<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 1999
REGISTRATION NO. 333-79969
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 4 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DURASWITCH INDUSTRIES, INC.
(Name of small business issuer in the Charter)
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NEVADA 3679 88-0308867
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
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234 S. EXTENSION ROAD, MESA, ARIZONA 85210
(Address of Principal Place of Business or Intended Principal Place of Business
and Telephone Number of Principal Executive Offices)
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R. TERREN DUNLAP, CHIEF EXECUTIVE OFFICER
DURASWITCH INDUSTRIES, INC.
234 S. EXTENSION ROAD
MESA, ARIZONA 85210
(480) 833-3131
(Name, Address, and Telephone Number of Agent for Service)
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Copies to:
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P. ROBERT MOYA, ESQ. STEVEN D. PIDGEON, ESQ.
MARK K. BRIGGS, ESQ. RICHARD B. STAGG, ESQ.
QUARLES & BRADY LLP SNELL & WILMER L.L.P.
ONE E. CAMELBACK ROAD, SUITE 400 ONE ARIZONA CENTER
PHOENIX, ARIZONA 85012-1649 400 EAST VAN BUREN
(602) 230-5500 PHOENIX, ARIZONA 85004
(602) 382-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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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. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT
OF SECURITIES TO BE OFFERING PRICE AGGREGATE OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
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Common Stock, par value $.001 per
share.......................... 3,450,000 shares $9.00 $31,050,000 $8,632
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(1) Includes 450,000 shares to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED AUGUST 17, 1999
PROSPECTUS
3,000,000 SHARES OF COMMON STOCK
[DURASWITCH INDUSTRIES, INC. LOGO]
DuraSwitch Industries, Inc. is offering 3,000,000 shares of its common
stock. DuraSwitch's common stock currently is traded on the OTC Bulletin Board
under the symbol "DSWT." Upon completion of this offering, our common stock will
be listed on Nasdaq National Market under the symbol "DSWT." DuraSwitch
estimates that the offering price will be between $8.00 and $9.00 per share
after giving effect to a 4.25 to 1 reverse stock split.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 4 FOR A DISCUSSION OF FACTORS YOU SHOULD CONSIDER BEFORE
BUYING SHARES OF DURASWITCH'S COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE OFFERING PER SHARE TOTAL
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Public Price................................................ $ $
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Underwriting Discounts and Commissions...................... $ $
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Proceeds to DuraSwitch...................................... $ $
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The underwriters have agreed to purchase all 3,000,000 of the shares if any
are purchased. Also, DuraSwitch and one of its stockholders have granted to the
underwriters a 45-day option to purchase up to an additional 450,000 shares of
common stock to cover over-allotments. If this option is exercised in full, the
underwriters will purchase 375,734 additional shares from DuraSwitch and 74,266
additional shares from the selling stockholder.
[Cruttenden Roth Logo]
The date of this prospectus is , 1999.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE CANNOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 3
Inside Front Cover: The top half of the page shows a detailed view of the
DuraSwitch PushGate(TM) components. The bottom half of the page is the table of
contents.
Gatefold layout: Drawings arranged under the "DuraSwitch.com" logo depicting the
different products in which our PushGate switches have been incorporated, next
to a close up picture of the switches or ICPs next to the product. The captions
under each of the products surrounding the DuraSwitch logo read as follows:
"Automotive Repair Equipment," "Aeronautical Controls," "Irrigation Systems
Controls," "Medical Equipment," "Retail (Point of Sale)," "Restaurant
Equipment," "Theme Park Transportation," and "Ship Bridge Controls." On the
right side of the page, under a DuraSwitch logo, is a caption that reads:
"DuraSwitch's products have been custom designed, engineered and manufactured
for a wide variety of applications requiring a durable, reliable, low cost
switch for slim profile designs that provide excellent tactile feedback." Under
that caption is a picture which reads "Awarded BEST Electronics Product 1998 by:
design news" award logo.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus summary.................... 1
Summary consolidated financial
information......................... 2
Risk factors.......................... 3
Forward-looking statements............ 7
Use of proceeds....................... 8
Dilution.............................. 9
Capitalization........................ 10
Dividend policy....................... 10
Selected financial data............... 11
Management's discussion and analysis
of financial condition and results
of operations....................... 12
Business.............................. 18
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PAGE
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Management............................ 29
Certain relationships and related
transactions........................ 33
Security ownership of certain
beneficial owners and management.... 35
Underwriting.......................... 36
Description of securities............. 38
Market for common stock and related
stockholder matters................. 40
Interest of named experts and
counsel............................. 42
Legal matters......................... 43
Experts............................... 43
Available information................. 43
Index to financial statements......... F-1
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<PAGE> 5
PROSPECTUS SUMMARY
To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors, financial statements and the notes to the
financial statements.
DURASWITCH INDUSTRIES, INC.
We design, manufacture and distribute custom electronic switches and
integrated controls panels, or ICPs, that are used to operate or control
products in a wide variety of commercial and consumer applications. Our switches
and ICPs are based upon an innovative technology that utilizes a magnetic-based
design we developed and patented.
Our executive offices are located at 234 S. Extension Road, Mesa, Arizona
85210. Our telephone number at that location is (480) 833-3131. Our web site
address is www.duraswitch.com. Information contained on our web site does not
constitute part of this prospectus.
THE OFFERING
Common stock offered: 3,000,000 shares.
Common stock
to be outstanding
after the offering: 8,495,407 shares. This number does not include: (a)
89,929 shares issuable upon the exercise of warrants
outstanding as of July 31, 1999, all of which were
exercisable at a weighted average exercise price of
$2.61 per share on that date; nor (b) 762,471 shares
issuable upon exercise of outstanding stock options at a
weighted average exercise price of $11.47 per share
granted under our 1997 and 1999 Stock Option Plans, of
which options for 536,942 shares were exercisable as of
July 31, 1999.
Over-allotment option: Up to 450,000 shares, 375,734 from DuraSwitch and 74,266
from a selling stockholder. If the underwriters exercise
the over-allotment option in full, the total public
price will be $ , the total underwriting
discounts will be $ , and DuraSwitch will
receive total proceeds of $ .
Proposed Nasdaq National
Market symbol: "DSWT"
Use of proceeds: - Research and development
- Capital equipment acquisition
- Expansion of sales and marketing efforts
- Repayment of indebtedness
- Acquisitions
- Working capital
Reverse stock split: Unless we tell you otherwise, the information in this
prospectus reflects a 4.25 to 1 reverse stock split,
through which each 4.25 shares of our common stock were
combined into one share on August 17, 1999, and assumes
no exercise of the underwriters' over-allotment option
or the representative's warrant.
1
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The consolidated statement of operations data for the year ended December
31, 1998 and for the six months ended June 30, 1998 includes the results of
operations of Aztec Industries, Inc. since our acquisition of Aztec on January
31, 1998. Prior to January 31, 1998, we were a development stage company. The
June 30, 1999 unaudited consolidated balance sheet As Adjusted column reflects
the sale of the 3,000,000 shares of common stock at an assumed initial public
offering price of $8.50 per share after deducting underwriting discounts and
estimated offering expenses and the application of the estimated net proceeds
from this offering.
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SIX MONTHS ENDED
PERIOD FROM MAY 1, 1997 JUNE 30,
(DATE OF INCEPTION) TO YEAR ENDED -----------------
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
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(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 6 $ 1,355 $ 680 $ 858
Gross profit (loss)....................... (1) 55 40 (145)
Loss from operations...................... (453) ( 1,549) (627) (1,203)
Net loss.................................. (449) ( 1,599) (645) (1,204)
Non-cash discount(1)...................... -- (740) (740) --
Net loss attributable to common
stockholders............................ $ (449) $(2,339) $(1,385) $(1,204)
Net loss per common share, basic and
diluted................................. $(0.12) $ (0.55) $ (0.33) $ (0.22)
Weighted average common shares
outstanding, basic and diluted.......... 3,787 4,269 4,219 5,390
</TABLE>
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JUNE 30, 1999
(UNAUDITED)
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ACTUAL AS ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 110 $22,121
Working capital............................................. (195) 21,858
Total assets................................................ 2,360 24,067
Long-term debt, net of current portion...................... 288 80
Total stockholders' equity.................................. 937 22,893
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(1) A non-cash charge of $740,000 was incurred in connection with a beneficial
conversion feature relating to the sale of convertible preferred stock on
June 29, 1998, which is described in more detail in note 11 to the
consolidated financial statements of DuraSwitch included in this prospectus.
2
<PAGE> 7
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before buying shares of our common stock.
WE HAVE NOT BEEN PROFITABLE AND WILL NEED TO INCREASE MARKET AWARENESS OF OUR
PRODUCTS AND FURTHER DEVELOP DISTRIBUTION AND SALES CHANNELS TO ACHIEVE
PROFITABILITY
We have not made a profit since beginning operations in May 1997. We lost
$1,204,000 in the first six months of 1999, and we are not certain whether we
will ever become profitable. In order to become profitable, we must, among other
things, achieve sufficient sales to cover our operating costs. To increase
sales, we must increase market awareness of our products, further develop
distribution channels and hire and retain key sales representatives. Our failure
to accomplish these objectives would have a material adverse effect upon our
business, financial condition and results of operations.
FAILURE OF OUR PRODUCTS TO ACHIEVE WIDESPREAD COMMERCIAL ACCEPTANCE WILL HINDER
OUR GROWTH
We have not yet proven conclusively that our products will achieve
widespread acceptance in the market. Our failure to achieve widespread market
acceptance for our products in a timely manner would have a material adverse
effect on our business, financial condition and results of operations. For our
products to achieve widespread commercial acceptance, we must establish that:
- products using our patented technology will comply with error rates that
are acceptable for market applications;
- our products can be successfully produced at a reasonable cost;
- our products will continue to perform reliably in the field with an
acceptable useful life; and
- customers and end users will continue to demand our products.
It is difficult this early in the market cycle to accurately predict the
level of market acceptance our products will achieve. There can be no assurance
that we will market our products successfully.
WE DO NOT HAVE INDEPENDENT MARKETING STUDIES THAT SUPPORT OUR BELIEFS THAT OUR
PRODUCTS ARE SUPERIOR TO THOSE OF OUR COMPETITORS AND WILL ACHIEVE COMMERCIAL
SUCCESS
In order for us to successfully implement our business strategy, we will
need to demonstrate that our switches are superior to any other switch currently
on the market. Our beliefs regarding the anticipated commercial success of our
products are based solely on the experience, judgment and assumptions of
management. We have not obtained third party feasibility studies relating to our
products nor do we plan to commission any such studies. If our expectations
prove to be incorrect, then our ability to successfully market our products will
be impaired.
AS AN EARLY STAGE COMPANY, WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT
DIFFICULT TO EVALUATE OUR STRATEGY AND FORECAST OUR OPERATING RESULTS
We have a limited operating history which makes it difficult for investors
to evaluate us. Our prospects are subject to risks and uncertainties encountered
by companies that rely on new products for almost all their revenues. We cannot
assure you that our business strategy will be successful. In addition, our net
revenue in any given period is difficult to forecast because it is dependent
largely upon the timing of product purchases by our customers. Although we have
secured numerous purchase orders for prototypes and production models of our
products, our customers are not required to make subsequent purchases and the
timing of any future purchases may vary significantly from quarter to quarter
until we establish a larger customer base.
3
<PAGE> 8
OUR ANTICIPATED SALES GROWTH DEPENDS ON CONVERTING OUR PROSPECTIVE CUSTOMERS AND
SMALLER EXISTING CUSTOMERS TO SIGNIFICANT ONGOING CUSTOMERS
Over 50% of our net sales in the fiscal year ended December 31, 1998 were
generated from sales to 13 accounts, including one account which constituted
over 11% of our net sales. We do not expect that these customers will account
for significant product sales in 1999, although we anticipate that one current
customer and several prospective customers will account for a significant
percentage of our sales for the balance of 1999. There can be no assurance,
however, that our current significant customer will order as much product in
1999 as we anticipate or that any of our prospective customers will order any
products. A reduction in orders from any principal customers or a failure to
receive significant purchase commitments from prospective customers could hinder
our anticipated growth and may have a material adverse effect on our business,
financial condition and results of operations.
INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY DIMINISH OUR PRODUCTS'
COMPETITIVE TECHNOLOGICAL ADVANTAGES COMPARED TO PRODUCTS USING EXISTING
TECHNOLOGIES
Our success depends, in large part, on our ability to protect our
technology through United States and foreign patents, to preserve our trade
secrets and to operate without infringing the proprietary rights of third
parties. We may be unable to secure patents for all of our products and
processes. In addition, the issuance of patent protection for all our products
may not afford us sufficient protection from competitors that develop similar or
superior technologies. We asked the U.S. Patent Office to reexamine one of our
patents after discovering two expired patents that concern related technology.
Our intent is to strengthen the protection provided by this patent, but there is
some chance the U.S. Patent Office could decide to modify or eliminate claims
made in the patent.
As we take our products to market, we could encounter unanticipated patent
barriers. A patent search will not disclose applications that are currently
pending in the U.S. Patent Office, and there could be one or more pending
applications that would take precedence over one of our applications. In
addition, the laws of some countries do not protect our proprietary rights to
the same extent as do the laws of the U.S. Accordingly, there can be no
assurance that we will be able to protect our proprietary technology against
unauthorized copying or use. We may have to engage in litigation to enforce our
proprietary rights, to determine the validity and scope of our proprietary
rights or to defend or assert claims of infringement. Any litigation or failure
to protect our proprietary rights could have a material adverse effect upon our
business, financial condition and results of operations.
OUR FAILURE TO EFFECTIVELY MANAGE EXPANSION OF OUR OPERATIONS MAY RESULT IN
STRAINED RELATIONSHIPS WITH OUR DISTRIBUTORS, CUSTOMERS AND STRATEGIC PARTNERS
Our anticipated expansion may significantly strain our resources. To manage
growth effectively, we must continue to enhance our operational, financial and
management systems, successfully manage our quality assurance program, and
expand, train and manage our employee base. If we are unable to achieve these
objectives, we may be forced to suspend or delay shipments, make expensive and
time consuming design modifications, recall previously shipped products, absorb
service and warranty costs, experience unfavorable publicity, or experience
strained relationships with distributors, customers and strategic partners. Due
to the custom nature of our products and the level of technical and design
engineering expertise necessary to support our customers, there may be only a
limited number of persons with the requisite skills to serve in these positions
and it may become increasingly difficult for us to hire those persons. There can
be no assurance that we will be able to manage our expansion effectively. Any
failure to effectively manage our anticipated future growth could have a
material adverse effect on our business, financial condition and results of
operations.
4
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OUR ABILITY TO SIGNIFICANTLY INCREASE SALES DEPENDS ON OVERCOMING OUR
COMPETITORS' LONG TERM RELATIONSHIPS WITH THEIR CUSTOMERS AND OUR CUSTOMERS'
RELUCTANCE TO TRY OUR NEW SWITCH TECHNOLOGY
The market for products similar to ours is highly competitive and well
established. We face competition from over 125 companies in the
electro-mechanical switch market and a substantial number of membrane switch and
integrated controls panel manufacturing companies in their respective markets.
Many of our competitors have established products, high name recognition, and
significantly greater resources than ours. Our competitors' long term
relationships with their customers along with OEMs' reluctance to try our new
switch technology could also result in our inability to achieve sufficient
sales. We also may encounter difficulties in convincing potential customers to
change over to our new technology because they may be required to incur
additional engineering and tooling costs. Direct and indirect competition could
materially and adversely affect our revenues and profitability through pricing
pressure and loss of sales.
In addition, it may be possible for one of our competitors to develop
technology that is superior to ours, which could adversely affect our
competitive position. Our failure to compete successfully would have a material
adverse effect on our business, financial condition and results of operations.
IF WE ARE UNABLE TO SECURE FAVORABLE LICENSING AGREEMENTS, WHICH IS A KEY
ELEMENT OF OUR STRATEGY TO GAIN MARKET ACCEPTANCE OF OUR PRODUCTS, OUR
ANTICIPATED GROWTH WILL BE IMPAIRED
In order to promote widespread market acceptance of our products, we intend
to license our technology to other electronic switch or ICP manufacturers.
However, we may be unable to enter into any favorable licensing agreements with
other manufacturers. Our inability to secure favorable licensing agreements
could negatively impact our anticipated growth and may materially and adversely
affect our business, financial condition and results of operations.
OUR FAILURE TO EFFECTIVELY MANAGE STRATEGIC ALLIANCES AND ACQUISITIONS MAY
RESULT IN INCREASED EXPENSES AND ADVERSELY AFFECT OUR PROFITABILITY
We intend to consider acquisitions of and strategic alliances with other
companies in our industry that could complement our business. There can be no
assurance that suitable acquisition or alliance candidates can be identified or,
if identified, that we will be able to consummate such transactions. Further,
there can be no assurance that we will be able to integrate successfully any
acquired companies into our existing operations, which could increase our
operating expenses. Moreover, any acquisition by us may result in potentially
dilutive issuances of equity securities, incurrence of additional debt and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect our profitability. Acquisitions and strategic alliances
involve numerous risks, such as diverting attention of our management from other
business concerns, our entrance into markets in which we have no or only limited
experience and the potential loss of key employees of the acquired company, any
of which could have a material adverse effect on our business, financial
condition and results of operations.
TO IMPLEMENT OUR LONG TERM BUSINESS PLAN, WE MAY NEED MORE CAPITAL, WHICH COULD
BE DIFFICULT AND EXPENSIVE TO OBTAIN
We may not be able to fully implement our long term business plan with only
the net proceeds from this offering. We may need additional equity or debt
financing, collaborative arrangements with corporate partners, or funds from
other sources for these purposes. Additional financings may be dilutive to our
stockholders or may require us to relinquish rights to some of our technologies
or products. We may have difficulty obtaining these funds on acceptable terms,
if at all. If we cannot obtain adequate funds from operations or additional
sources of financing, we may experience operational difficulties and delays due
to a lack of working capital and, as a result, our business, financial condition
and results of operations will be materially and adversely affected.
5
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THE PUBLIC OFFERING PRICE OF OUR COMMON STOCK HAS BEEN DETERMINED ARBITRARILY
AND ITS FUTURE PUBLIC TRADING PRICE COULD BE ADVERSELY AFFECTED BY LACK OF AN
ACTIVE TRADING MARKET AND OVERALL STOCK MARKET CONDITIONS
There is limited trading in our common stock on the OTC Bulletin Board,
which is currently traded under Rule 15c2-11 under the Securities Exchange Act
of 1934. On August 17, 1999, we effected a 4.25 to one reverse stock split
through which each 4.25 shares of our common stock were combined into one share.
Although our common stock will be listed on the Nasdaq National Market upon
completion of this offering, there is no assurance that an active trading market
will develop or be sustained. In addition, we must maintain minimum listing
requirements for continued listing on the Nasdaq National Market. If we are
unable to maintain these requirements on an ongoing basis, our common stock
could be delisted from the Nasdaq National Market, which could have an adverse
effect on the price of our stock.
Because of our limited operating history and lack of an active trading
market prior to this offering, the public offering price of the common stock
will be arbitrarily determined by negotiations between us and the underwriters
rather than the market prices that prevailed prior to this offering, and will
not necessarily bear any relationship to our assets, book value, results of
operations, or any other generally accepted indicia of value. Accordingly, the
public offering price may not be indicative of the prices that may prevail in
the public market following the offering. Therefore, the market price of our
common stock might decline below the public offering price, particularly if we
are unable to obtain widespread commercial acceptance for our products and
significantly increase our sales. Also, the trading price of our common stock
could be subject to significant fluctuations in response to variations in
quarterly operating results, regulatory actions, developments in the electronic
switch industry, the condition of the overall stock market or general economic
conditions.
WE MAY LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR COMPUTER SOFTWARE OR
SYSTEMS, OR THOSE OF MATERIAL THIRD PARTIES, ARE NOT YEAR 2000 COMPLIANT
Our business depends on the operation of systems that could potentially be
impacted by Year 2000 related problems. We have conducted an internal review and
believe our computer software and systems are Year 2000 compliant. We are in the
process of contacting key suppliers regarding their Year 2000 readiness. We are
also developing contingency plans for third party and internal failures related
to the Year 2000 issue. However, we may incur material unanticipated expenses to
remedy any problems caused by the Year 2000 related failures of our or third
parties' information or other systems. The incurrence of these expenses could
have a material adverse effect on our business, financial condition and results
of operation.
STOCKHOLDERS WHO ACQUIRE COMMON STOCK IN THIS OFFERING WILL NOT BE ABLE TO
EXERCISE SIGNIFICANT INFLUENCE OVER OUR CORPORATE AFFAIRS AS MINORITY
STOCKHOLDERS
Following the completion of this offering, our executive officers and
directors will own approximately 41% of the outstanding common stock, including
shares of common stock subject to options and warrants. Accordingly, as a group,
our executive officers and directors will have significant influence over
electing directors to our board, approving matters requiring stockholder
approval and our general affairs. This concentration of ownership could delay or
prevent a change of control that minority stockholders may believe is in their
best interests.
6
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FORWARD-LOOKING STATEMENTS
This prospectus, including the documents incorporated by reference in this
prospectus, contains forward-looking statements regarding our plans,
expectations, estimates and beliefs. Actual results could differ materially from
those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may" and other similar
expressions. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Forward-looking statements in these documents include, but are not
necessarily limited to, those relating to our:
- beliefs regarding the competitive technological advantages and
anticipated commercial success of our products;
- intention to achieve widespread commercial acceptance of our technology
and products;
- ability to carry out our business strategy;
- objective to establish DuraSwitch technology as the design standard in
the electronic switch and ICP industries;
- estimates of the size of and anticipated growth in the switch and ICP
markets;
- success in developing new or enhanced products to take advantage of
market opportunities or to respond to competition;
- ability to complete any future acquisitions of products or businesses;
- achieving Year 2000 compliance or the impact on us of any third party's
failure to achieve Year 2000 compliance; and
- ability to protect our intellectual property.
When you consider the forward-looking statements in this prospectus, you
should keep in mind the information located in the "Risk Factors" section and
elsewhere in this prospectus because the risks discussed in that cautionary
information, among others, could cause our actual results to be worse than those
described in any forward-looking statements.
7
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USE OF PROCEEDS
Assuming a public offering price of $8.50 per share, we estimate that we
will receive $22,260,000 in net proceeds from this offering, $25,134,365 if the
over-allotment option is exercised in full, after deducting the estimated
underwriting discounts and offering expenses. We anticipate using the net
proceeds from this offering as follows:
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APPLICATION OF NET PROCEEDS APPROXIMATE AMOUNT PERCENTAGE
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Research and development.................................... $ 2,000,000 9.0%
Capital equipment acquisition............................... 2,000,000 9.0%
Sales and marketing......................................... 1,700,000 7.6%
Repayment of indebtedness................................... 449,000 2.0%
General corporate and working capital purposes, including
possible acquisitions of and investments in competing or
complementary businesses and technologies................. 16,111,000 72.4%
----------- -----
Total............................................. $22,260,000 100.0%
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We anticipate using the net proceeds from this offering to:
- fund engineering, tooling, and testing equipment related to research and
development of additional switch and integrated controls panel
configurations using our patented technology as well as refinements and
patentable design variations as new applications are developed;
- expand our manufacturing capability through capital equipment purchases
for manufacturing cells dedicated to high-volume customers;
- expand our sales and marketing efforts, including increasing awareness of
our products' competitive advantages, enhancing our presence on the
Internet, and hiring more regional sales managers to support our
independent sales representative firms in the United States; and
- repay approximately $124,000 of outstanding debt we used to purchase
equipment, which bears interest at an annual rate of 13.2% and is due
March 31, 2002, and $325,000 we borrowed from two stockholders on April
30, 1999 and July 1, 1999 we used for working capital, which bears
interest at an annual rate of 10% and is due July 1, 2000.
The balance of the net proceeds of this offering, approximately 72.4%, will
be available for working capital and general corporate purposes such as
acquisitions, increased accounts receivable, increased inventory, increased
payroll expenses for new employees and professional services fees, and is not
committed to specific uses identified in this prospectus. As a result, we will
have broad discretion in using the net proceeds of this offering and you will
not have an opportunity to evaluate the relative merits of those unspecified
uses prior to your investment. In addition, the amounts actually expended on any
particular project may vary significantly from our current plans, particularly
given our early stage of operations. We also may use a portion of the proceeds
from the offering for possible acquisitions of, or investments in, companies
that expand, complement or are otherwise related to our current business.
However, we have no current plans, agreements or commitments with respect to any
acquisitions of, or investments in, other companies. Pending these uses, we will
invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
8
<PAGE> 13
DILUTION
Our net tangible book value as of June 30, 1999 was $(79,641) or $(0.01)
per share of common stock. Net tangible book value is total tangible assets less
total liabilities. Net tangible book value per share is determined by dividing
net tangible book value by the total number of outstanding shares of common
stock. Without taking into account any other changes in our net tangible book
value subsequent to June 30, 1999, other than to give effect to the sale of the
3,000,000 shares of common stock in this offering at an assumed public offering
price of $8.50 per share and the receipt of the estimated net proceeds from this
offering after deducting the estimated underwriting discounts and other
estimated expenses of this offering, our as adjusted net tangible book value as
of June 30, 1999 would have been $22,180,359 or $2.61 per share. This represents
an immediate increase in net tangible book value of $22,260,000 or $2.62 per
share to existing holders of common stock and an immediate dilution to new
investors purchasing shares of common stock in this offering of $5.89 per share.
The following table illustrates the per share dilution to new investors
purchasing shares of common stock in this offering:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $8.50
Net tangible book value per share before offering......... $(0.01)
Increase in net tangible book value per share attributable
to new investors....................................... $ 2.62
Pro forma net tangible book value per share after
offering.................................................. $2.61
-----
Per share dilution to new investors......................... $5.89
=====
</TABLE>
The following table summarizes as of June 30, 1999, the number of shares of
common stock purchased, the percentage of total cash consideration paid, and the
average price per share paid by present stockholders and by investors purchasing
shares of common stock in this offering before deducting the estimated
underwriting discounts and other estimated expenses of this offering. The
following table excludes:
- 89,929 shares of common stock issuable upon the exercise of warrants
outstanding as of July 31, 1999 at a weighted average price of $2.61 per share,
all of which were exercisable,
- 762,471 shares of common stock issuable upon exercise of options
outstanding as of July 31, 1999 at a weighted average exercise price of $11.47
per share, of which options for 536,942 shares were exercisable, and
- up to 375,734 shares of common stock issuable by DuraSwitch upon exercise
of the underwriters' over-allotment option.
The exercise of these options and warrants could result in further dilution to
new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED CASH CONSIDERATION PAID
-------------------- ---------------------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 5,495,407 64.7% $ 4,930,184 16.2% $0.90
New investors....................... 3,000,000 35.3% $25,500,000 83.8% $8.50
--------- ----- ----------- -----
Total..................... 8,495,407 100.0% $30,430,184 100.0%
========= ===== =========== =====
</TABLE>
9
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of DuraSwitch as of June
30, 1999. The table also reflects a 4.25 to one reverse stock split through
which every 4.25 shares of our common stock was combined into one share on
August 17, 1999. The As Adjusted column reflects the sale of the 3,000,000
shares of common stock offered by this prospectus at an assumed initial public
offering price of $8.50 per share after deducting underwriting discounts and
estimated offering expenses and the application of the estimated net proceeds
from this offering.
<TABLE>
<CAPTION>
1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Long-term debt.............................................. $ 287,700 $ 79,571
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 5,495,407 shares issued and outstanding,
actual; 8,495,407 shares issued and outstanding, as
adjusted(1)............................................ 5,496 8,946
Additional paid in capital................................ 5,071,951 27,025,023
Accumulated deficit....................................... (3,992,799) (3,992,799)
Promissory note receivable................................ (147,263) (147,263)
----------- -----------
Total stockholders' equity................................ 937,385 22,893,907
----------- -----------
Total capitalization................................... $ 1,225,085 $22,973,478
=========== ===========
</TABLE>
- ---------------
(1) Excludes 89,929 shares of common stock issuable upon the exercise of
warrants outstanding as of July 31, 1999 at a weighted average price of
$2.61 per share, all of which were exercisable, and 762,471 shares of common
stock issuable upon exercise of options outstanding as of July 31, 1999 at a
weighted average exercise price of $11.47 per share, of which options for
536,942 shares were exercisable. Also excludes 206,353 shares of common
stock reserved for future issuance under our 1999 stock option plan.
DIVIDEND POLICY
We have not declared or paid cash dividends on our common stock. We intend
to retain all future earnings to fund the operation of our business and,
therefore, do not anticipate paying cash dividends in the foreseeable future.
10
<PAGE> 15
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data has been derived from our audited
1997 and 1998 consolidated financial statements and unaudited 1998 and 1999
interim consolidated financial statements and does not provide all of the
information contained in our financial statements and the related notes. Our
unaudited 1998 and 1999 interim consolidated financial statements, in the
opinion of our management, reflect all adjustments, including only normal
recurring adjustments, that we consider necessary for fair presentation of our
consolidated financial position and results of operations for these periods. The
consolidated statement of operations data for the year ended December 31, 1998
and for the six months ended June 30, 1998 includes the results of operations of
Aztec Industries, Inc. since our acquisition of Aztec on January 31, 1998. Prior
to January 31, 1998, we were a development stage company.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997 SIX MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, -----------------
1997 1998 1998 1999
------------------- ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales....................................... $ 6 $ 1,355 $ 680 $ 858
Cost of goods sold.............................. (7) (1,300) (640) (1,003)
------ ------- ------- -------
Gross profit (loss)............................. (1) 55 (40) (145)
Selling, general and administrative expenses.... (310) (1,195) (484) (807)
Research and development........................ (142) (409) (183) (251)
------ ------- ------- -------
Loss from operations............................ (453) (1,549) (627) (1,203)
Other income (expense).......................... 4 (50) (18) (1)
------ ------- ------- -------
Net loss........................................ (449) (1,599) (645) (1,204)
Non-cash discount(1)............................ -- (740) (740) --
------ ------- ------- -------
Net loss attributable to common stockholders.... $ (449) $(2,339) $(1,385) $(1,204)
====== ======= ======= =======
Net loss per common share, basic and diluted.... $(0.12) $( 0.55) $ (0.33) $ (0.22)
Weighted average common shares outstanding,
basic and diluted............................. 3,787 4,269 4,219 5,390
====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1999
-------------- -------------
1997 1998 (UNAUDITED)
---- ------ -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $236 $ 144 $ 110
Working capital (deficit)................................... 203 (26) (195)
Total assets................................................ 380 1,528 2,360
Long-term debt, net of current portion...................... 0 158 288
Total stockholders' equity.................................. 324 752 937
</TABLE>
- ---------------
(1) A non-cash charge of $740,000 was incurred in connection with a beneficial
conversion feature relating to the sale of convertible preferred stock on
June 29, 1998, which is described in more detail in note 11 to the
consolidated financial statements of DuraSwitch included in this prospectus.
11
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and the related notes appearing elsewhere in this
prospectus.
GENERAL
We develop, manufacture, and distribute a new, patented electronic switch
based on magnetic technology. Using this unique technology, we produce custom
switches and integrated controls panels, or ICPs. We were incorporated on May 1,
1997 as "Total Switch, Inc." In order to use stock to acquire other businesses
necessary for our growth, we combined with SOS International, Inc., an inactive
publicly traded company, on December 31, 1997. SOS had nominal assets and no
liabilities on the date of the acquisition. Under a stock exchange agreement,
SOS changed its name to "DuraSwitch Industries, Inc." and acquired all of Total
Switch's stock in exchange for approximately 85% of SOS's outstanding common
stock. As a result of this transaction, Total Switch became a wholly-owned
subsidiary of DuraSwitch, and Total Switch's former stockholders acquired a
controlling interest in DuraSwitch.
During the period from our date of inception, May 1, 1997, to December 31,
1997, we focused on:
- developing our patented technology,
- financing our operations through private equity issuances, and
- searching for an acquisition candidate that had an existing customer
base, sales network and relevant manufacturing capability.
On January 31, 1998, we acquired Aztec Industries, Inc., a membrane switch
manufacturing and graphics printing firm, in exchange for 70,588 shares of our
common stock and the cancellation of approximately $60,000 of loans we made
previously to Aztec. As a result of this acquisition, we acquired:
- an established infrastructure of technical design and manufacturing
personnel,
- customer contacts, and
- manufacturing capabilities sufficient to support a significant increase
in our sales.
We generate revenues primarily from the design, development, production and
sale of our switches and ICPs. Because we typically custom design switches and
ICPs to meet a specific customer's needs, we initially charge our customer for
non-recurring engineering and tooling costs related to the new design. If the
new design meets specifications and the customer decides to proceed to the
prototype stage, we typically charge the customer for producing limited
quantities of the new product. Finally, if the customer proceeds to full
production of the product utilizing our switch or ICP, the customer will order
the desired quantity of product. In the future, we intend to generate additional
revenues through licensing our technology to other companies in the switch
industry from which we expect to receive a percentage of the revenues derived
from sales of products utilizing our switches and ICPs.
The majority of our net sales reported for the year ended December 31, 1998
were related to sales of membrane switches and graphic printing products to
existing customers. In addition, because our operations in 1998 were devoted
primarily to design engineering and creating DuraSwitch technology prototypes
for new customers, we did not generate significant sales from production
purchase orders during 1998. However, in the process of engineering and creating
prototype switches for several customers, we have since received production
purchase orders for delivery during 1999 and 2000. At June 30, 1999, we had
approximately $2 million of purchase orders outstanding.
The principal elements comprising our cost of sales are raw and packaging
materials, engineering and assembly, labor, and manufacturing overhead. The
major raw materials used in the manufacture of our products include magnets,
stamped metal, plastics and conductive inks. Costs related to engineering design
12
<PAGE> 17
work performed for customers and prototype models sold to customers are charged
to cost of goods sold. Costs of sales are affected by the efficiency of
production methods and utilization of manufacturing capacity, areas in which we
have significant experience.
Our research and development expenses are comprised mainly of labor and
leased equipment costs. Our selling, general and administrative expenses are
comprised mainly of labor costs associated with our sales and administrative
personnel and costs associated with our facilities.
We are in the early stage of operations and, as a result, the relationship
between net sales, cost of goods sold, and operating expenses reflected in the
financial information included in this prospectus may not represent future
expected financial relationships. Much of our cost of goods sold and operating
expenses are relatively fixed costs. We expect that these expenses will increase
if net sales and transaction volumes increase, but at a slower rate of growth
than the corresponding sales increase. Given our current stage of operations and
relatively short operating history, we do not believe period to period
comparisons of results of operations are meaningful.
MATTERS AFFECTING COMPARABILITY
For the six months ended June 30, 1998 and year ended December 31, 1998,
our financial results include Aztec's results of operations since the
acquisition date of January 31, 1998.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales increased $177,314 or 26% from $680,466 in the six
months ended June 30, 1998, the "1998 Period", to $857,780 in the six months
ended June 30, 1999, the "1999 Period". The increase was primarily due to a low
level of sales during the six months ended June 30, 1998, which consisted of
only five months of consolidated operations compared to six months of
consolidated operations in the quarter ended June 30, 1999. Sales during the
1998 Period were attributable primarily to sales of membrane type switches and
graphic printing services provided to Aztec customers. During 1998, using
Aztec's sales and manufacturing capabilities, we began marketing our patented
technology and producing prototypes of custom-designed switches and ICPs. During
the 1999 Period, a majority of net sales represented sales of new switches and
ICPs relying on our patented technology rather than older membrane switch
technology.
COST OF GOODS SOLD. Cost of goods sold increased $362,487, or 57%, from
$640,119 in the 1998 Period to $1,002,606 in the 1999 Period. As a percentage of
net sales, cost of goods sold increased from 94% in the 1998 Period to 117% in
the 1999 Period primarily due to increased manufacturing overhead and
application engineering costs related to developing an infrastructure to
accommodate anticipated increased sales volumes of new products using our
patented technology.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $323,804 from $483,619 or 71% of net sales in
the 1998 Period to $807,423 or 94% of net sales in the 1999 Period. The increase
in selling, general and administrative expenses was directly related to building
an infrastructure to accommodate anticipated sales and production growth,
including an increase in personnel and occupancy costs relating to additional
manufacturing and office space in 1999.
RESEARCH AND DEVELOPMENT. Research and development costs for the 1998
Period increased 37% from $183,583 to $251,113 in the 1999 Period. Research and
development expenses have increased due to growth in our engineering staff over
the past 12 months. We do not expect prior levels of research and development
expenses to be indicative of research and development expenses for future
periods, which we expect to increase substantially.
LOSS FROM OPERATIONS. As a result of the factors described above, loss
from operations increased from $626,855 in the 1998 Period to a loss of
$1,203,362 in the 1999 Period.
13
<PAGE> 18
OTHER INCOME/EXPENSE. We had other expense for the 1998 Period of
$18,025 compared to other expense of $923 for the 1999 Period. Other expense in
the 1998 Period consisted primarily of interest expense relating to notes
payable and capital equipment leases assumed in the Aztec acquisition. During
the 1999 Period, other expense was offset primarily by a gain on equipment sold.
PERIOD FROM MAY 1, 1997, DATE OF INCEPTION, TO DECEMBER 31, 1997 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales increased $1,349,028 from $5,762 in fiscal 1997,
commencing May 1, 1997 and ending December 31, 1997, to $1,354,790 in 1998. The
significant increase in sales was primarily a result of our transition from a
start-up company to an operating company during that period. We ceased to be
classified as a start-up company and became an operating company when we
acquired Aztec on January 31, 1998. Over 50% of our net sales in 1998 were
generated from 13 accounts, including one account which constituted over 11% of
our net sales.
COST OF GOODS SOLD. Cost of goods sold increased $1,293,573 from $6,617
in fiscal 1997 to $1,300,190 in 1998. The significant increase in cost of goods
sold was primarily a result of our transition from a start-up company to an
operating company as described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $309,951 in fiscal 1997 to $1,194,905 in
1998. The increase in 1998 was primarily a result of our transition during that
period from a start-up company to an operating company as described above.
During fiscal 1997, we also incurred lower occupancy and personnel related
expenses because the fiscal year consisted of only eight months.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
from $142,550 in fiscal 1997 to $409,425 in 1998, an increase of $266,875 or
187%. During fiscal 1997, we incurred research and development costs related to
the initial development of our patented technology. The significant increase in
these costs in fiscal 1998 was primarily due to the addition of development
engineering personnel and equipment in order to continue development of new
products and our patented technology.
LOSS FROM OPERATIONS. As a result of the factors described above, loss
from operations increased from $453,356 in fiscal 1997 to a loss of $1,549,730
in 1998.
OTHER INCOME/EXPENSE. We had other income for fiscal 1997 of $4,270
compared to $49,698 of other expense in 1998. The primary components of other
expense during 1998 were interest expense related to notes payable and capital
equipment leases assumed in the Aztec acquisition.
NON-CASH DISCOUNT ON PROCEEDS OF PREFERRED STOCK FOR BENEFICIAL
CONVERSION FEATURE. We incurred a non-cash charge of $740,000 for a beneficial
conversion feature relating to the sale of convertible preferred stock on June
29, 1998, which increased the net loss attributable to common stockholders in
1998 to $2,339,428.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1999
Net cash used in operating activities in the 1998 Period was $463,954,
consisting primarily of net loss and a decrease in accounts payable, offset
primarily by depreciation and amortization and a decrease in inventory. Net cash
used in operating activities in the 1999 Period was $1,207,389, consisting
primarily of net loss and increases in accounts receivable, inventory, and
prepaid expenses and other current assets, which include deferred costs of this
offering of $303,928, offset by depreciation and amortization and increases in
accounts payable, accrued expenses and other current liabilities.
Net cash used in investing activities in the 1998 Period was $111,069,
consisting primarily of a $58,246 advance to Aztec prior to the acquisition of
Aztec and purchases of property and equipment relating to research and
development activities. Net cash used in investing activities in the 1999 Period
14
<PAGE> 19
was $381,225, consisting primarily of a $150,000 loan to Camplex/Concept W
Corporation and purchases of telephone system, computer and manufacturing
equipment. The loan to Camplex was made in anticipation of an acquisition of
Camplex, which we subsequently abandoned.
Net cash provided by financing activities in the 1998 Period was $376,469,
consisting primarily of net proceeds from the sale of stock, which was partially
offset by principal payments or notes payable and capital leases. Net cash
provided by financing activities in the 1999 Period was $1,554,270, consisting
primarily of net proceeds from the sale of stock, proceeds from notes payable to
stockholders, and a $158,670 increase in borrowings on our line of credit,
offset by principal payments on notes payable and capital leases and net
payments on loans from officers.
CASH FLOW FOR THE PERIOD FROM MAY 1, 1997, DATE OF INCEPTION, TO DECEMBER 31,
1997 AND YEAR ENDED DECEMBER 31, 1998
Net cash used in operating activities in fiscal 1997 was $260,727,
consisting primarily of net loss partially offset by depreciation and
amortization, issuance of stock for services, bad debt expense, decrease in
prepaid expenses and other current assets and an increase in accounts payable.
Net cash used in operating activities in 1998 was $1,235,824, consisting
primarily of net loss partially offset by depreciation and amortization,
issuance of stock for services, a decrease in inventory, and an increase in
accrued expenses and other current liabilities.
Net cash used in investing activities in fiscal 1997 was $104,527,
consisting primarily of an advance to Aztec and purchases of property and
equipment relating to research and development activities. Net cash used in
investing activities in 1998 was $180,195, consisting primarily of a $58,246
advance to Aztec prior to the acquisition of Aztec, $61,434 for capitalization
of patent filings costs, and purchases of a manufacturing air filtration system,
clean room, and various research and development testing equipment.
Net cash provided by financing activities in fiscal 1997 was $601,235,
consisting primarily of net proceeds from the sale of stock partially offset by
net payments on loans from officers. Net cash provided by financing activities
in 1998 was $1,323,898, consisting primarily of net proceeds from the sale of
stock and proceeds from loans from officers, partially offset by principal
payments on notes payable and capital leases and net payments on our line of
credit.
In December 1998, we obtained a $150,000 bank line of credit that bears
interest at the prime rate plus 2% and expires in December 1999. On May 27,
1999, we renegotiated the line of credit, which allows us to borrow up to
$250,000. The line of credit bears interest at the prime rate plus 2% and
matures in May 2000. Outstanding borrowings on the line of credit are secured by
a lien on our inventory, accounts receivable and bank accounts. As of June 30,
1999, $158,670 was outstanding under this credit facility. If the line of credit
is not renewed, we intend to seek alternative sources of financing, including
obtaining a replacement credit facility from an alternative lender, or the sale
of additional equity.
As part of the Aztec acquisition, we assumed a note payable, due March 31,
2002, which requires monthly payments of principal and interest of $4,536 with
interest at 13.2% per year. This note is secured by a lien on some of our
property and manufacturing equipment. As of June 30, 1999, the amount owed on
this note payable was $123,982. Also in connection with the Aztec acquisition,
we assumed an unsecured note payable to one of Aztec's former owners, due
January 31, 2000, which carried imputed interest at 8.0% per year. As of June
30, 1999, the amount owed on this note payable was $44,427.
During fiscal 1997 and 1998, we borrowed a total of approximately $280,000
from individuals affiliated with us. We repaid approximately $240,000 of these
loans as of December 31, 1998. These advances and unsecured notes accrued
interest at rates ranging from 9.5% to 18% per year. The balance of these notes
was paid in the first quarter of 1999.
We have entered into various capital leases for the purchase of property
and equipment. These capital leases bear interest at rates ranging from 11.7% to
24.0%. As of June 30, 1999, future principal payments under our existing capital
leases were approximately $116,000.
15
<PAGE> 20
On April 30, 1999, we borrowed $200,000 from two stockholders. These loans
mature on July 1, 2000 and bear an annual interest rate of 10%. On June 30,
1999, the promissory notes were reduced by $75,000 in connection with the
exercise of warrants. We borrowed an additional $200,000 from these stockholders
under the same terms on July 1, 1999.
At December 31, 1998, we had approximately $2,284,000 in net operating loss
carryforwards available for federal income tax purposes. We have not recognized
any benefit from these operating loss carryforwards, which are subject to
significant restriction under current tax law and begin to expire in 2011.
Assuming completion of this offering, we estimate that capital expenditures
through fiscal 2000 will be approximately $2 million, relating primarily to the
expansion of manufacturing capability through equipment purchases for large
volume customer production cells and automation as economically feasible.
We have experienced significant operating losses since our inception. We
expect our capital expenditure and working capital requirements in the
foreseeable future to increase depending on the rate of our expansion, our
operating results, and other adjustments in our operating plan as needed in
response to competition or unexpected events. We believe that the net proceeds
from this offering, together with available borrowings and our current cash and
cash equivalents, will be sufficient to meet our anticipated cash needs for
working capital, capital expenditures and required debt payments through fiscal
2000. If we are unable to meet our liquidity requirements or if our liquidity
requirements increase, we may require additional financing. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. There can be no assurance that financing will be
available in sufficient amounts or on terms we find acceptable, if at all.
CHANGE IN AUDITORS
On January 3, 1999, DuraSwitch engaged Deloitte & Touche LLP as its
independent auditor for the fiscal year ending December 31, 1998, to replace the
firm of McGladrey & Pullen, LLP. Our management dismissed McGladrey & Pullen,
LLP on December 28, 1998 after consulting with the board of directors on an
informal basis. Our board of directors approved the change in auditors on March
8, 1999.
The reports of McGladrey & Pullen, LLP on DuraSwitch's financial statements
for 1997 did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or accounting
principles.
There were no disagreements with McGladrey & Pullen, LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of McGladrey &
Pullen, LLP, would have caused McGladrey & Pullen, LLP to make reference to the
matter in their report.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 requires that an enterprise recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The statement is effective
for our fiscal year ending December 31, 2001. We have not completed evaluating
the impact of implementing the provisions of SFAS No. 133.
YEAR 2000 COMPLIANCE
Our business depends on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others:
- computer hardware and software systems used by us to deliver services to
our customers, including hardware and custom and off-the-shelf software
supplied by third parties;
16
<PAGE> 21
- communications networks, such as the Internet, which we use to help
market our products by providing information to its existing customers
and potential customers;
- internal information technology and non-information technology systems of
our customers and suppliers;
- computer hardware and software systems we use internally to manage our
business, including hardware and custom and off-the-shelf software
supplied by third parties; and
- non-information technology systems and services we use in our business,
such as telephone systems and HVAC systems.
We have completed an internal review of the hardware and software systems
and communication networks we use to deliver services to our customers and to
manage our business, including non-information technology systems. We have
recently purchased software upgrades, computer systems and a phone system which
we believe are all Year 2000 compliant at a total cost of approximately $75,000.
We believe that all of the hardware and software we utilize in our business are
Year 2000 compliant, including non-information technology systems. Therefore, we
do not anticipate any additional expenditures to bring our systems into
compliance. However, failure of currently owned equipment or software to operate
properly with regard to the Year 2000 could require us to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
our business, financial condition and results of operations.
The success of our efforts may depend on the success of third parties in
dealing with their Year 2000 issues. Many of these organizations may not be Year
2000 compliant, and the impact of widespread supplier failure on our business is
difficult to determine. We are in the process of surveying our key suppliers
regarding their Year 2000 compliance programs and status. We have completed
approximately 75% of this process, and we expect to complete this process by
September 1, 1999. As a contingency against failure of a key supplier to provide
us with needed material or services, we have identified alternative sources for
our key suppliers. We are also developing additional contingency plans to deal
with any other issues that might arise because a key supplier is not Year 2000
compliant. We believe that we will have identified alternative third-party
suppliers and implemented any other necessary contingency plans by September 30,
1999.
The failure of a key supplier to become Year 2000 compliant could produce a
scenario in which that supplier is not able to supply us with needed material or
services and, as a result, we would not be able to provide a customer with
product until the supplier became Year 2000 compliant. We believe that we can
minimize the chances that this scenario will occur by identifying alternative
suppliers. No assurances can be given, however, that alternative third-party
suppliers will be successful in meeting our requirements or, if met, that the
terms of the arrangement will be as favorable as those of our current suppliers,
which could increase our expenses and have a material adverse effect on our
business, financial condition, and results of operations.
Any failure to address any unforeseen Year 2000 issue could adversely
affect our business, financial condition, and results of operations.
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<PAGE> 22
BUSINESS
OVERVIEW
We design, manufacture and distribute custom electronic switches and
integrated controls panels, or ICPs, featuring an innovative technology we
developed and patented utilizing a magnetic-based design. We believe this
patented technology allows us to provide a complete solution to the design
challenges faced by original equipment manufacturers, or OEMs, and component
suppliers seeking durable, reliable, low cost switches and ICPs that can easily
be incorporated into a slim profile, flat panel design without sacrificing the
consistent tactile feedback response, or "click," highly desired by end users.
Design News, a trade magazine widely read by design engineers, named our
DuraSwitch PushGate switch "The Best New Product of 1998" in the
electrical/electronic category.
Since commencing operations in May 1997, we have provided design solutions
for a number of leading companies in a variety of industries by custom-designing
switches and ICPs that met critical needs. Examples include:
- the panel operating the doors of the monorail trains at Walt Disney
World,
- lawn irrigation systems made by Rain Bird/Clemar Manufacturing Corp.,
- boat trolling motors distributed by Johnson Worldwide Associates,
- mobile digital phones developed by Ericsson Inc.,
- ship bridge radar control systems produced by Raytheon Marine Company,
- peripheral controls for computers made by Covid Inc., and
- restaurant food preparation equipment made by Frymaster and by Ram
Center, Inc.
INDUSTRY ANALYSIS
Electronic switches and ICPs are used in a wide variety of consumer,
industrial and agricultural products, such as computers, consumer electronics,
mobile phones, consumer appliances, automobiles, fitness equipment, trains,
ships, airplanes, tractors, generators, medical devices and commercial food
preparation equipment. According to a report by Frost & Sullivan on the 1998
World Electronic Switch Market, electronic switches and ICPs represent a
multi-billion dollar global market.
HISTORY OF ELECTRONIC SWITCHES
In its simplest form, an electronic switch controls the flow of electric
current; press the switch to complete the circuit and the current flows to
operate a micro-processor, which in turn, performs the desired function. More
complex switches, such as volume control knobs on car radios, regulate the
precise voltage and electric current flowing through the circuit; turn the knob
to increase the voltage and the volume is increased.
ELECTRO-MECHANICAL SWITCHES. Prior to the early 1970s, traditional
electro-mechanical switches represented the design standard in the switch and
ICP industries. According to a report by Frost & Sullivan on the 1998 World
Electronic Switch Market, switches and ICPs relying on this traditional
technology represented approximately $2.75 billion of this market.
Electro-mechanical switches operate by pushing, turning or sliding a
button, knob or lever to mechanically activate a series of movable parts that
will close or complete an electrical circuit within the switch itself. The
primary advantage of electro-mechanical switches is their feedback response,
which permits the user to feel, and sometimes see or hear, changes in the switch
when it is activated. An example of feedback response is the clicking noise or
sensation perceived by a user when pushing a traditional car radio station
preset button or turning the mechanical volume control knob.
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Although they offer excellent tactile feedback to the user,
electro-mechanical switches are bulky and mechanically complex. We believe the
mechanically complex design of these switches makes them prone to excessive
wear, resulting in high production and maintenance costs to customers and end
users. Originally designed prior to the trend toward miniaturization in
electronic components, electro-mechanical switches are not used in many
electronic products produced today because their bulkiness and cost hinders
their incorporation into the slim-profile designs currently desired by the
market. In addition, the typical design of products incorporating
electro-mechanical switches requires the switch to protrude through a panel,
making these products difficult to clean and environmentally seal, a design flaw
that makes this type of switch undesirable for products used in settings such as
hospitals, kitchens and outdoors.
MEMBRANE SWITCHES. In response to the increasing demand for slim
profile, low cost, flat controls panels and push-button switches for electronic
equipment, a new electronic switch design was introduced in the early 1970s
relying on membrane switch technology. Since their introduction, membrane
switches have captured a significant share of the electronic switch and ICP
markets.
Membrane switches consist of multiple, thin-film layers topped by an
overlay with printed graphics or instructions to operate the device in which the
switch is incorporated. A typical example of a membrane switch is found on most
microwave oven control panels, which feature a graphical overlay layer with
numbered buttons and other controls functions, such as "start," "cook" and
"defrost." Membrane switches generally are thinner, more durable and less
expensive to produce and maintain than electro-mechanical switches. They usually
feature a flat, washable surface, which can be easily cleaned and disinfected,
an important feature in products used in settings such as hospitals and
kitchens. Unfortunately, membrane switches, while responsive to customer demands
for a slimmer/flat profile, improved durability, and lower costs of production
and maintenance, provide no feedback response to the user. Without tactile
feedback, users cannot be certain they have activated the switch or they may
activate the switch several times, which could cause the opposite effect of what
the user intended. Also, the user may push the switch much harder than required
to activate the switch, resulting in excessive wear and premature failure.
To solve the feedback response problem, membrane switch manufacturers
typically have offered two solutions. The first solution is to add electronic
audio or visual feedback responses, such as a "beep" sound, light, or status
icons on a display, to inform the user when the switch has been activated.
However, this "solution" increases the cost, complexity and size of the product
to which it is added, thus decreasing the advantages of a membrane switch over
an electro-mechanical switch.
The second option to overcome the feedback response problem is to
incorporate a metal, rubber or plastic dome as part of the membrane switch. When
pressed by a user, the center of the dome will invert and contact the circuit on
the membrane layer beneath it. When functioning properly, the dome will return
back to its original shape as the user releases his or her finger from the
switch, which is intended to provide tactile feedback response to the user.
Domed membrane switches, however, require inconsistent amounts of force to be
activated, which has proven frustrating to the user, and often do not provide
the desired tactile feedback response. In addition, domes are prone to failure
due to materials fatigue and, as a result, are less reliable than membrane
switches without domes. Accordingly, using domes in membrane switches to solve
the feedback response problem does not provide the consistent tactile feedback
desired by the customer or end user, and increases the cost and design
complexity while decreasing the reliability of the switch.
ELECTRONIC INTEGRATED CONTROLS PANELS. An ICP typically combines various
types of switches, such as push-button, rotary, slider, toggle, dial and rocker
switches, into a single control panel with a printed circuit board, lighting,
displays and other components. ICPs may include membrane switches, electro-
mechanical switches, or a combination of both. The ICP industry consists of
several ICP component parts manufacturers producing printed circuit boards,
displays, panels and switches, which we believe represents a global
multi-billion dollar market that is significantly larger than the
electro-mechanical and membrane switch markets combined.
OEMs that produce products using ICPs typically have faced a number of
design challenges, involving tradeoffs between size, cost, durability and
customer preferences. To obtain the benefits offered
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<PAGE> 24
by membrane switches without forfeiting the consistent tactile feedback response
characteristic of electro-mechanical switches, OEMs often combine
electro-mechanical rotary switches with flat panel membrane push-button
switches, requiring a marriage of incompatible technologies. In addition to
increasing the mechanical complexity and bulkiness of the ICP, this design also
requires that a hole be drilled through the membrane switch surface to insert
the electro-mechanical rotary switch, increasing the ICP's cost, compromising
its ability to be environmentally sealed, and disrupting the flat profile of a
typical ICP design using all membrane switches. Also, OEMs usually must deal
with a number of different component producers used in their ICPs, which
requires a relatively high level of coordination and technological
compatibility. As a result, both OEMs and component suppliers are seeking low
cost integrated solutions to the design challenges presented by traditional
switch technologies, which force designers to sacrifice desired features in
exchange for others.
THE DURASWITCH SOLUTION
We have developed a patented technology that enables us to custom design
switches and ICPs that overcome the design challenges presented by traditional
electro-mechanical and membrane switch technologies. We believe our
magnetic-based design enables us to provide switches and ICPs that:
- offer superior durability, enhanced reliability and better value compared
to switches utilizing traditional technologies,
- can be easily integrated into flat panel, slim profile designs, and
- provide the consistent tactile feedback response highly desired by end
users.
In short, our technology enables us to combine the best features of
membrane switches without sacrificing the consistent tactile feedback response
provided by electro-mechanical switches. Our patented technology and design
expertise, together with our strategic alliances with other companies engaged in
the electronic switch and ICP industries, also enables us to offer an integrated
solution to the design challenges faced by OEMs.
COMPETITIVE ADVANTAGES
The key to our technology is its simplicity of design and reliance on
magnetic force rather than mechanical parts or the elastic properties of
materials to operate a switch. Based on our management's experience in the
electronic switch and ICP industries, we believe our products offer the
following competitive advantages compared to switches and ICPs using traditional
electro-mechanical and membrane switch technologies:
SIGNIFICANTLY GREATER DURABILITY AND RELIABILITY. Because our products
rely on a magnetic-based design with few moving parts and virtually no stress,
fatigue, or potential breaking points, we believe they are significantly more
durable and reliable than traditional electro-mechanical and membrane switches.
Since January 1998, we have been testing one of our DuraSwitch PushGate
switches. To date, it has exceeded 250 million activations on an electronic
counter and is still operating without a single failure. We believe this test
result supports our belief in the reliability and durability of our products. By
eliminating or reducing the mechanical complexity and precision required by
traditional technologies, we believe our patented design makes our switches and
ICPs significantly more reliable than electro-mechanical and membrane switches.
CONSISTENT TACTILE FEEDBACK RESPONSE. Unlike membrane switches and some
electro-mechanical switches, our design consistently produces a distinctive
"click" each time the user activates our switch. This capability enables us to
design and produce switches that do not require the addition of audio or visual
cues, such as beeps, lights, or status icons, to artificially provide feedback
to the user, a solution that would otherwise increase the complexity, size, and
cost of the switch design. We are unaware of any other switch capable of
providing the consistent tactile feedback response highly desired by end users
in a low cost, slim profile design.
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EASE OF INTEGRATION IN SLIM PROFILE DESIGN. Because our switches use a
multiple thin layer design that incorporates a flexible circuit rather than
bulky mechanical parts, they are easily integrated into flat panel/slim profile
products currently desired by the market. This design also eliminates the need
to breach the surface of the ICP, enabling our ICPs to be easily sealed,
cleaned, disinfected, and protected from harsh environmental conditions.
ENHANCED VALUE TO COST RATIO. We believe our switches offer an enhanced
value to cost ratio compared to switches using traditional technologies. Our
switches cost significantly less to produce than comparable electro-mechanical
switches because our magnetic-based design typically requires fewer and less
expensive components. In addition, devices using our switches are more durable
and reliable than electro-mechanical switches and are therefore less costly to
maintain than devices using electro-mechanical switches. Although the initial
selling price of our switches may be higher than membrane switches in some
instances, we believe the durability and reliability of our switches, combined
with their ability to provide a consistent tactile feedback response, make our
switches more desirable to end users and less expensive to maintain than
membrane switches.
REPRESENTATIVE DESIGN SOLUTIONS
Despite our relatively short operating history, we have custom designed
solutions for a number of leading companies that have incorporated, or are in
the process of incorporating, our switches into their products. A representative
sample of these companies and the products in which our switches are being
incorporated is set forth below.
DISNEY WORLD/MONORAIL TRAINS. We designed and provided an integrated
controls panel that operates the doors on Disney World's monorail trains. Our
product, which replaced a controls panel that relied on dome membrane switches,
has been reported to us by Disney World to be significantly more durable and
reliable than its predecessor, which required frequent repairs and replacements
due to heavy usage, repeated daily cleanings by a power wash system and
continuous exposure to the elements.
ERICSSON/CELLULAR PHONES. We custom designed and are producing a unique
switch to be used in a new mobile phone developed by Ericsson Inc., a leading
mobile phone manufacturer. The design challenge presented by Ericsson was to
develop a small, durable, multi-function rotary switch featuring a pop-up
mechanism. Utilizing our patented technology and design experience, we custom
designed a switch that, according to Ericsson, met or exceeded all of Ericsson's
product specifications much more quickly and at a substantially lower cost than
our competitors. As a result, Ericsson has placed multiple orders with us for a
significant number of these switches. We believe Ericsson will place additional
orders for even greater numbers of our switches as they achieve full production
of their new mobile phone.
HENNESSEY/AUTOMOTIVE SERVICING EQUIPMENT. We custom designed and
produced an ICP incorporated in automobile tire balancing equipment manufactured
by Hennessey Industries, Inc. The ICP we developed replaced a controls panel
that used a flat panel membrane switch design that, according to Hennessey, was
prone to excessive wear due to the harsh treatment the switches received in auto
repair shops. In response to Hennessey's need for switches that were more
durable and provided consistent feedback response even through the work gloves
worn by mechanics, we designed an ICP utilizing our durable, responsive
push-button switches underneath a magnetic graphic overlay capable of being
replaced quickly and inexpensively if worn out, scratched, gouged, or otherwise
rendered unreadable.
STRATEGY
Our objective is to become a leader in the electronic switch and ICP
industries by making DuraSwitch technology the design standard for electronic
switches and ICPs. In order to achieve this objective, we intend to implement
the following strategies:
EXPLOIT AND MAINTAIN OUR PATENTED TECHNOLOGY'S COMPETITIVE ADVANTAGES
We intend to exploit and maintain our patented technology's competitive
advantages, compared to electro-mechanical and membrane switch technologies,
with the objective of making our technology the
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design standard in the industry. We intend to pursue this strategy by
aggressively marketing our products to broaden market awareness, implementing a
licensing program to more quickly achieve widespread distribution of our
technology, and investing heavily in research, development and testing to
further refine our technology and expand its possible applications in a wide
variety of industries.
INCREASE MARKET AWARENESS OF DURASWITCH'S PATENTED TECHNOLOGICAL ADVANTAGES
We will aggressively promote our patented technology and design expertise
to achieve widespread market awareness of our products' advantages compared to
switches and ICPs relying on traditional technologies. Our promotional efforts
will target design engineers and purchasing managers, whom we believe are the
primary decision makers within our potential customer base. These efforts will
include increased advertising in trade magazines, substantially increasing
traffic to our web site, participating actively in vendor-sponsored seminars for
design engineers, and aggressively promoting our products in the trade media. We
believe that promoting our success in providing custom-designed solutions for a
number of high-profile companies will further enhance market awareness of our
products and their unique competitive advantages.
LEVERAGE OUR STRATEGIC ALLIANCES AND ACQUISITIONS
We intend to leverage our current strategic alliances as well as pursue new
strategic alliances and acquisitions to increase market share. We have developed
strategic alliances with various companies that design and produce complementary
electronic component products. Through these strategic alliances, we have
expanded our customer base by making sales to new customers that have existing
relationships with our partners. These strategic alliances also allow us to
expand our manufacturing capacity and co-market our products with complementary
electronic components produced by our partners. We expect to establish
additional strategic alliances with electronic components manufacturers to gain
these sales, marketing and manufacturing advantages and to obtain high quality
electronic components, such as liquid crystal displays, that we incorporate into
some of our ICP products.
We also will continue to search for strategic acquisition candidates. We
believe the electronic switch industry is fragmented and contains numerous
competitors possessing sales and marketing expertise, customer contacts, brand
recognition or industry experience greater than our own. Acquisition of one or
more of these competitors would permit us to expand our business faster than if
we developed those resources internally.
PROVIDE FULL SERVICE DESIGN ENGINEERING, TESTING AND MANUFACTURING CAPABILITY
We intend to be a "one stop shop" for design engineering, testing and
manufacturing for our customers. OEMs searching for a switch or ICP to install
in their products typically may be required to hire multiple engineers to design
the switch or ICP, hire a manufacturer to produce components, and contract with
another vendor for assembly. This multi-vendor approach is costly, complex and
time consuming, and requires a relatively high level of coordination and
compatibility. With our patented technology, our experienced technical and
engineering staff, and our production capabilities, we are able to offer a
single source for custom-designed products that combine the best features of
membrane and electro-mechanical switch technologies in an integrated solution
offering superior value, durability and reliability.
PRODUCTS
We have a number of switch products based on our patented magnetic-based
technology in various stages of production and development. We are currently
producing the DuraSwitch PushGate, DuraSwitch Rotor and DuraSwitch SnapRotor.
Switches under development include the DuraSwitch Slider and DuraSwitch Slammer.
Prices of our switches and ICPs range from under $1 for our most basic push-
button design to in excess of $6,000 for a complex flight simulator ICP
involving several different custom-designed controls panels.
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THE DURASWITCH PUSHGATE
A typical DuraSwitch PushGate switch consists of up to five bonded
micro-thin layers of materials, which collectively measure less than 1/10th of
an inch. The top layer of the switch is printed with a graphical overlay that
indicates which buttons must be pressed to activate a desired function, such as
"on", "defrost" and "cook" buttons on a microwave oven. Below the top layer is a
metal shield which keeps the magnetic field inside the switch, and protects the
switch from external electrical and magnetic interference. Below the shield is a
thin, flexible layer of magnetic material. Below the magnetic layer is spacer
material containing a hole through which a patented metal disc is pushed. The
disc has a small raised, off-center button that is pushed by the user through
the surface of the switch. A flexible circuit is located at the bottom of the
switch. When the button is pressed, the disc separates from the magnet and the
underside of the disc completes the circuit by touching the contacts located on
the flexible circuit. When the button is released, the magnet pulls the disc
upward and away from the switch contacts, into its resting position, and the
circuit is broken. This magnetic-based design produces a consistent tactile
feedback response to the user each time the switch is activated. For a graphic
display of the DuraSwitch PushGate, see the diagram on the inside front cover of
this prospectus.
THE DURASWITCH ROTOR
The DuraSwitch Rotor resembles a typical volume control knob on a car
radio, except that, unlike an electro-mechanical rotary switch, the back of our
switch is flat. The entire assembly can be less than 1/10th of an inch thick.
The DuraSwitch Rotor consists of a rotary knob containing embedded magnets, all
fastened to a flat surface. The top of the surface displays instructions for the
user. The bottom of the surface seals a circular space below the magnet
containing small, 1 mm, gold-plated balls. Beneath the circular space are
printed electronic circuits, which are activated through contact with the
gold-plated balls. When the user turns the knob, the magnet within the rotary
knob causes the gold-plated balls to rotate within their circular space. As the
balls roll across the flex-circuit membrane, they close or open the circuit and
convey the user's instructions to the device. The design of the DuraSwitch Rotor
also produces a consistent tactile feedback response to the user, so that the
user can feel each "click" as the knob is turned.
THE DURASWITCH SNAPROTOR
The DuraSwitch SnapRotor is a combination of a push-button switch and a
rotary switch. When not in use, the top of the rotor knob is flush with the
surface of the device on which it is mounted. When the top of the rotor knob is
pressed, the push-button portion of the switch is activated, sending a signal to
a microprocessor and the rotor knob pops up from the device. After the rotor
knob pops up, it can then be operated in the same manner as a typical rotary
switch, such as a volume control knob. After using the rotary switch feature,
the rotor can be pushed back into the device, which again activates the
push-button portion of the switch and sends a signal to a microprocessor. A
typical application for this switch would be a combination on/off button and
volume control knob.
SWITCHES UNDER DEVELOPMENT
The DuraSwitch Slider is similar to the DuraSwitch Rotor, except that it
uses a sliding lever instead of a rotating knob. When the slide is moved, the
sealed, gold-plated balls underneath the lever move, activating a microprocessor
as they pass across contacts on a flexible circuit. As a result of the
flexibility of the materials used in its design, the DuraSwitch Slider has the
additional advantage of being able to be mounted not only on a flat surface but
also on a curved surface such as the dashboard of a car. The DuraSwitch Slider
is in the final engineering stage and we expect it to be ready for production by
late 1999.
The DuraSwitch Slammer is a tamper-resistant switch that can be used in
applications such as ATMs, vending machines, slot machines and prisons, which
require extreme durability to overcome heavy usage or abuse. The design is
similar to the DuraSwitch PushGate, but is designed to be more robust. The
DuraSwitch Slammer is in the design stage and we expect it to be ready for
production by late 1999.
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Generally, our switches are custom-designed to meet specific design
challenges or customer requirements dictated by the nature of specific
applications. Accordingly, all of these switch designs may be adapted quickly
and easily to fit various types of integrated controls panel arrays and
electronic products. We are constantly refining our products and designing new
variations to meet our customers' design needs.
CUSTOMERS
We offer a variety of switches and ICPs to original equipment manufacturers
and component manufacturers that, in turn, install them into various devices
used in a wide variety of industries. These industries, companies and products
include:
<TABLE>
<CAPTION>
INDUSTRY COMPANY APPLICATION
-------- -------------------------------- -------------------------------------
<S> <C> <C>
AMUSEMENT PARKS.................. VGS Systems Engineering Company* Amusement park turnstiles
Walt Disney World Co.* Monorail train/ride controls
AUTOMOTIVE....................... Hennessy Industries, Inc.+ Tire balancer
AVIONICS......................... Aerospace Instrument Support, Flight control simulator
Inc.*
IDD Aerospace+ Aircraft cockpit control panels
COMMUNICATIONS................... Ericsson Inc.* Two-way radio/cell phones
Quintron Systems, Inc.* Military telcom equipment
COMPUTERS........................ Covid, Inc.* Video conferencing equipment
Telegyr Systems, Inc.* Electrical power distribution
ELECTRONIC ENTRY................. Marks U.S.A.+ Keyless locks
INDUSTRIAL CONTROLS.............. Alpha Technologies U.S., L.P.* Chemical processor controls
Anatel Corporation* Water treatment analysis
Boonton Electronics Corporation* Volt meter front panel test equipment
Cummins-Allison Corp.* Paper shredder controls
Dinet Distributed Networks, Industrial process controls
Inc.*
ETEC Systems, Inc.* PCB manufacturing equipment
Innovative Control Systems, Car wash controls
Inc.*
Jancy Engineering Company+ Portable magnetic drill bases
Optimation, Inc.* Data entry stations
Paxar Corporation* Label stitching equipment
Rain Bird, Clemar Mfg. Corp.* Commercial sprinkler controls
Siemens Energy & Automation, Industrial test equipment
Inc.+
US Filter Consumer Products, Water purification controls
Inc.*
MARINE........................... Raytheon Marine* Ship board radar controls
Johnson Worldwide+ Boat trolling motors
MEDICAL.......................... Etymotic Research, Inc.* Hand-held temperature sensors
GTR Labs, LLC* X-Ray equipment
HP/Heartstream* Medical defibrillators
Heska Corporation* Veterinary oxygen sensor device
Medivators, Inc.* Endoscope disinfectors
MILITARY......................... Raytheon Systems, Company* "Land Warrior" M-16 computers
POINT-OF-SALE.................... ProTix* Cash registers
Scan Corporation* Terminals
RESTAURANT....................... Dynamic Cooking Systems, Inc.* Oven controls
Frymaster* Portion dispensers
Lancer Corporation* Beverage portion dispensers
Radiant Systems* Order processing systems
RAM Center, Inc.* Frozen food dispensers
</TABLE>
- ---------------
+ Prototype
* In Production
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INTELLECTUAL PROPERTY
Our success depends on maintaining and protecting our proprietary
technology. As a result, we have adopted an intellectual property protection
policy designed to deter and stop infringement. To deter infringement, we file
U.S. and foreign patents for all our relevant material technological advances
and warn against potential infringement by posting patent numbers on our
products, packaging, and published materials. These materials include our web
site, business cards, letterhead, brochures, and advertisements. We intend to
prosecute litigation aggressively against infringers. In order to protect our
trade secrets and other intellectual property, we also require our employees,
consultants, advisors and collaborators to enter into confidentiality agreements
which prohibit the disclosure of proprietary information to third parties or the
use of proprietary information for commercial purposes. Our technical and sales
employees also must agree to disclose and assign to us all methods,
improvements, modifications, developments, discoveries, and inventions conceived
or developed on our time, using our property, or relating to our business. Our
management team has extensive experience in protecting technology from global
competitors and will oversee our intellectual property protection program.
We currently hold three U.S. Patents (Nos. 5,523,730, 5,666,096 and
5,867,082), and one Taiwanese Patent (No. NI-090979), for a "switch with a
magnetically-coupled armature." We also have several patent applications pending
in the U.S., Mexico, Canada, France, Great Britain, China, Taiwan, Italy and
Germany. We have made further filings under the Patent Cooperation Treaty and
through the European Patent Committee. In total, we have over 18 patent
applications in various stages of filing both in the U.S. and globally.
We currently own the following trademarks and service marks: DuraSwitch(R),
PushGate(TM), Rotor(TM), SnapRotor(TM), Slider(TM), Slammer(TM), DuraSwitch
ICP(TM), Touch the Future(SM), and DuraSwitch.com(TM). Each other trademark,
trade name or service mark appearing in this prospectus belongs to its holder.
We also intend to enter into licensing agreements with leading switch and
ICP manufacturers in selected industries in order to increase distribution of
our technology and increase market awareness of our products. We believe that
our ability to convince leading switch and ICP manufacturers to use our
technology will more broadly and rapidly create awareness and acceptance of our
technology in multiple market segments.
MARKETING AND SALES
We believe that the primary decision makers related to switches and ICPs
for our OEM customers are design engineers and, to a lesser degree, purchasing
managers. Therefore, our marketing and sales efforts will be directed
specifically toward convincing these individuals to use our products by:
- aggressively expanding our sales force,
- substantially increasing our advertising efforts,
- significantly enhancing our web site, and
- aggressively competing for product awards.
SALES FORCE & MANUFACTURER'S REPRESENTATIVE ORGANIZATIONS
We currently have four regional sales managers supervised by a Vice
President of Business Development. Our regional sales managers maintain our
relationships with several independent sales representatives groups. We contract
with these groups to call on potential customers in 39 states. For example, our
sales representative group responsible for the states of Ohio, Michigan,
Indiana, Kentucky and Pennsylvania primarily employs engineers in its sales
force and calls principally on automobile and appliance manufacturers. Our
regional sales managers call on potential customers in the remainder of the
continental United States.
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We believe that independent sales representatives generally are more
efficient than our own sales force at this stage of our development. Independent
sales representatives often have existing relationships that offer us immediate
access to potential customers. Our agreements with these independent sales
representatives provide for compensation on a straight commission basis and
cancellation on 30 days notice, which lower our employee-related costs.
WEB SITE: WWW.DURASWITCH.COM
Design engineers and purchasing managers, the individuals most likely to
make the decision to incorporate our switches and ICPs in their products,
frequently use the Internet to search for design solutions. Therefore, our web
site, www.duraswitch.com, is a key component of our current marketing efforts.
All of our advertising and promotional materials direct readers to our web site.
In addition to attracting potential customers to our web site for information,
we use our web site to generate interest in our products. We have already made
significant sales as a result of initial contact with customers through our web
site. Using our web site as a promotional tool also is less expensive than other
methods, is interactive, and reaches a global audience. Our web site has several
features, including:
- information about the comparative advantages of our patented technology,
accompanied by articles published by third parties about our products;
- virtual demonstrations of our products;
- technical data about our products to assist design engineers in designing
ICPs and electronic products using DuraSwitch components;
- e-mail communications links to our design engineers and sales
representatives to facilitate dialogue about how our products can be
integrated into the customers' products; and
- on-line product ordering capability.
ADVERTISING AND PUBLIC RELATIONS
We advertise in technical periodicals such as Electronic Engineering Master
(EEM), Engineering Design News (EDN) and Design News. We believe this media
exposure is a cost-effective method of capturing the attention of design
engineers. For example, Design News weekly publications are read by
approximately 334,800 design professionals throughout the world. Our
advertisements are focused on directing new customers to our web site. We also
are listed in annual industry specifiers guides, including:
- Medical Device Link,
- Electronic Manufacturers on the Net,
- Thomas Register, and
- Electronic Engineering Master.
In addition, we are conducting a public relations campaign to generate
articles highlighting our products to be published in trade magazines. To date,
our products have been recognized in several trade magazines, including
Appliance Manufacturing and Engineering Design News. In fact, Design News named
the DuraSwitch PushGate switch as "The Best New Product of 1998" in the
electrical/electronic category. In the next six months, we expect further
articles about our products to appear in a wide variety of medical, avionics,
industrial, manufacturing, engineering, new product and technology publications,
each designed to attract the attention of design engineers and purchasing
managers in those industries.
SEMINARS AND TRADE SHOWS
We intend to give educational presentations about our products at
vendor-sponsored seminars for product design engineers. At these seminars, we
will be able to meet with and provide attendees with information about our
technology and products through multi-media presentations, product
demonstrations,
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<PAGE> 31
brochures and samples. Attractive displays in our strategic partners' booths at
trade shows offer mutually advantageous opportunities by promoting our partners'
products as well as expanding awareness of our technology.
MANUFACTURING
We currently manufacture and assemble most of our products. We also have
the capability to manufacture off-site, including manufacturers and vendors in
other countries. To facilitate our expected growth, we are pursuing strategic
alliances and acquisitions to further enhance our manufacturing capabilities.
ON-SITE MANUFACTURING AND ASSEMBLY CAPABILITIES
Our on-site design, manufacturing and assembly capabilities include:
- an approximately 33,000 square foot facility consisting of manufacturing
and assembly space, a full service testing lab and a clean room;
- a full service engineering and design team comprised of 11 design
engineers and technical staff;
- strict quality standards in our operations reviewed regularly by an
in-house quality assurance team including an experienced quality
consultant; and
- state of the art information technology hardware and software, including
the latest versions of AutoCad, Pro Engineering, Mechanical Desktop and
Solid View software.
These features allow us to meet the standards of our customers' on-site
quality reviews of our design, testing and manufacturing capabilities.
We are also developing cellular manufacturing processes to manufacture
complete products, from start to finish, within a manufacturing cell. Each
manufacturing cell will produce related products, which allows the team members
in each cell to gain expert knowledge about their designated products as well as
the special processes, equipment, and specific quality control techniques
required to manufacture them. Immediate feedback, minimal supervision, ease of
expansion through duplication of manufacturing cells and minimal space
requirements are benefits of this manufacturing approach.
OFF-SHORE MANUFACTURING
Our executive management team has experience using companies in foreign
countries to provide manufacturing, assembly, acquisition, raw materials and
tooling services. During the past 12 months, we have contracted for production,
assembly, tooling and delivery services with companies in the People's Republic
of China. We have obtained high quality materials and products on a timely basis
from these companies, at a significantly lower cost than domestic vendors. To
the extent our products or raw materials are purchased from, or manufactured or
assembled by, our overseas suppliers, we are subject to the general risks of
conducting business internationally, including:
- unexpected changes in regulatory requirements;
- fluctuations in currency exchange rates;
- tariffs and other barriers and restrictions;
- potentially adverse tax consequences; and
- the burdens of complying with a variety of foreign laws.
In addition, our international operations will be subject to international
political and economic instability and changes in diplomatic and trade
relationships. These factors may force us to find more costly or less desirable
alternative sources for products, services or raw materials, which could
materially and adversely impact our business, financial condition and results of
operations in the future or require us
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<PAGE> 32
to modify our business practices. Due to the risks of international political,
economic and geographic issues, we obtain quotes from alternative foreign and
domestic suppliers for each customer account that we outsource to our foreign
vendors.
COMPETITION
We operate in highly competitive markets, facing competition from over 125
other companies in the electro-mechanical switch industry, and a substantial
number of membrane switch and ICP manufacturing companies. Our five main
competitors in the electro-mechanical switch industry are Grayhill, Inc., Cherry
Corporation, C&K Components, Inc., Oak Grigsby, Inc., and Cole Instrument Corp.
Our five principal competitors in the membrane switch industry are Xymox
Technologies, GM Nameplate, Molex, Incorporated, Integrated Data Systems, Inc.
and Topflight Corporation. Our five main competitors in the ICP industry are
Lucas Controls, Inc., Eaton Corporation, Rockwell International, Inc./Allen
Bradley Division, Johnson Controls, Inc. and United Technologies Corporation.
Many of our present and potential competitors have more established products,
greater name recognition, stronger sales distribution arrangements, and
significantly greater resources than we have. We also expect to compete with
companies that have substantial manufacturing, marketing and distribution
capabilities; areas in which we may have less experience. Competition, direct
and indirect, could materially and adversely affect our revenues and
profitability through pricing pressure and loss of sales. Competitors' long term
relationships and manufacturers' reluctance to try a new technology could result
in loss of sales. The failure to compete successfully would have a material
adverse effect upon our business and financial condition.
EMPLOYEES
As of July 15, 1999, we had 61 employees, 55 of which work full time. We
have 16 employees in our engineering department, 10 in management and
administration, 10 in sales and marketing, and 25 in manufacturing. None of our
employees is represented by a union. We believe our relationship with our
employees is positive.
FACILITIES
Our principal administrative, design, testing, manufacturing, and assembly
facilities are located in Mesa, Arizona, where we presently lease 33,650 square
feet of office and manufacturing space in a building located at 234 South
Extension Road. This facility consists of approximately 10,000 square feet of
office space and 23,650 square feet of manufacturing space. Our lease terminates
on January 1, 2004, subject to our option to extend the term for an additional
two years. The base monthly rent for 1999 is $13,000. Future minimum monthly
rental payments are $16,000 for 2000 and $17,000 for 2001. We believe our
current facilities will be sufficient for our operational purposes for the
foreseeable future and any additional facilities needed thereafter will be
available on commercially reasonable terms.
ENVIRONMENTAL MATTERS
A portion of our operations involve screen printing and the use of inks.
Due to these operations, we emit a low volume of volatile organic compounds. We
believe we have satisfied all regulatory requirements necessary to conduct our
operations.
LEGAL PROCEEDINGS
From time to time, we may be subject to claims and litigation incident to
our business. As of the date of this prospectus, we are not involved in any
claim or legal proceeding.
Designing, testing, manufacturing, marketing and sale of our products
entail an inherent risk of product liability claims. Although we currently have
product liability insurance coverage of $2 million, product liability insurance
coverage can be expensive, difficult to obtain and may not be available on
acceptable terms, if at all, in the future. Product liability insurance coverage
might not be adequate to cover our costs of responding to product liability
claims, even ones without merit. Therefore, product liability claims could
materially and adversely affect our business, financial condition, or results of
operations.
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<PAGE> 33
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of DuraSwitch, their ages, and their
positions held with DuraSwitch are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
R. Terren Dunlap....................... 54 Chief Executive Officer, Chairman of the Board and
Director
Anthony J. Van Zeeland................. 58 Chief Operating Officer, Executive Vice President of
Engineering and Director
Robert J. Brilon....................... 39 President, Chief Financial Officer, Treasurer and
Secretary
J. Thomas Webb......................... 47 Executive Vice President of Marketing and Director
John W. Hail........................... 68 Director
Steven R. Green........................ 40 Director
William E. Peelle...................... 50 Director
Michael A. Van Zeeland................. 24 Director
</TABLE>
R. TERREN (TERRY) DUNLAP has served as Chairman of the Board of Directors
and Chief Executive Officer of DuraSwitch since our formation in May 1997. From
1983 to March 1994, Mr. Dunlap served as Chairman and Chief Executive Officer of
Sensory Science Corp. (formerly Go-Video, Inc.), a publicly held manufacturer of
consumer electronic video products which he founded. From April 1994 to present,
Mr. Dunlap has served as a consultant to Sensory Science Corp. Mr. Dunlap also
serves as a director of Advantage Marketing Systems, Inc., a publicly held
provider of health products. Mr. Dunlap received a B.S. degree in Business
Administration from Ashland University and a J.D. degree from Ohio Northern
University.
ANTHONY J. VAN ZEELAND has served as a director and as Chief Operating
Officer and Executive Vice President of Engineering of DuraSwitch since our
formation in May 1997. From 1990 to 1997, Mr. Van Zeeland was employed as Vice
President of Engineering at DataHand Systems, Inc., a computer keyboard
manufacturing company. During the same time period, he was also a director and
Director of Development Engineering of Monopanel Technologies, Inc., a membrane
switch manufacturing company. Mr. Van Zeeland holds a B.S. degree in Physics and
a Masters of Science in Materials Engineering from the University of Wisconsin.
Anthony J. Van Zeeland is the father of Michael A. Van Zeeland.
ROBERT J. BRILON became President and Chief Financial Officer of DuraSwitch
in November 1998. From May 1997 until November 1998, Mr. Brilon served as a
financial and business consultant to DuraSwitch. Between January 1997 and
November 1998, Mr. Brilon was Chief Financial Officer of Gary Gietz Master
Builder, a luxury custom home builder. Between April 1995 and December 1996, Mr.
Brilon was Corporate Controller for Rental Service Corp., a publicly held
industrial equipment rental company. Between April 1993 and April 1995, Mr.
Brilon served as Chief Financial Officer and Vice President of Operations and
Administration of DataHand Systems, Inc. Mr. Brilon holds a B.S. degree in
Business Administration from the University of Iowa and is a C.P.A.
J. THOMAS WEBB has served as a director of DuraSwitch since April 1998 and
part-time as Executive Vice-President of Marketing of DuraSwitch since November
1998. Since 1986, Mr. Webb has served as the Chief Executive Officer and
Chairman of the Board of Camplex/Concept W Corporation, a broadcast equipment
manufacturer. Mr. Webb attended Emporia State University.
JOHN W. HAIL has served as a director of DuraSwitch since March 1999. Since
1988, Mr. Hail has served as Chief Executive Officer and Chairman of the Board
of Directors of Advantage Marketing Systems, Inc., a publicly held provider of
health and beauty products. He also serves on the board of directors of Pre-Paid
Legal Services, Inc., a publicly held company engaged in the sale of legal
services contracts. Mr. Hail received an honorary doctorate degree from Oklahoma
City University.
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<PAGE> 34
STEVEN R. GREEN has served as a director of DuraSwitch since June 1998. He
has been the Managing Director of Blackwater Capital Partners L.P., the selling
stockholder, since November 1997. Between 1990 and November 1997, Mr. Green
acted as a sole practitioner in the field of investment banking, specializing in
mergers and acquisitions, initial public offerings, refinancings,
recapitalizations, and reorganizations. Mr. Green holds a B.A. degree from
U.C.L.A.
WILLIAM E. PEELLE has served as a director of DuraSwitch since May 1999.
Mr. Peelle founded Peelle Law Offices Co. in 1994 and has practiced law and
represented a number of businesses since 1975. Mr. Peelle has also served as the
elected prosecuting attorney of Clinton County, Ohio, since 1994. Mr. Peelle has
served as counsel or as a member of the Board of several community
organizations. Mr. Peelle received his J.D. from Ohio Northern University, and
has a B.S. degree in Business Administration from Ohio State University.
MICHAEL A. VAN ZEELAND has served as a director of DuraSwitch since May
1997. Mr. Van Zeeland is currently a graduate student at U.C.L.A., working on
his Ph.D. in plasma physics. From January 1998 to September 1998, we employed
him as an engineering physicist. During the summer of 1997, he was employed at
Arizona State University working on theoretical physics. During the summer of
1996, Mr. Van Zeeland worked as an intern at the University of California-Irvine
in a program funded by the National Science Foundation. From August 1995 to May
1996, Mr. Van Zeeland worked as an intern under the NASA Space Grant Program,
where he wrote FORTRAN programs, ran simulations and collected data to use to
study hurricane formation. From May 1992 to August 1993, he worked as an
Engineer Technician with DataHand Systems, Inc. Mr. Van Zeeland holds a B.S.
degree in Engineering Physics from the University of Arizona.
Executive officers serve at the discretion of the board of directors.
Our success depends largely on the efforts of R. Terren Dunlap, Chief
Executive Officer and Chairman of the Board, and Anthony J. Van Zeeland, Chief
Operating Officer/Executive Vice President of Engineering and the inventor of
our patented technology. In particular, Mr. Van Zeeland has been the key
individual responsible for developing solutions to the design challenges
presented by our customers. We believe our relationships with these individuals
are good. However, we cannot ensure that the services of these individuals will
continue to be available to us in the future. Although we have obtained "key
man" life insurance with DuraSwitch as beneficiary, if we lose either of these
individuals and cannot find adequate replacements, there would be a material
adverse effect on our business, financial condition and results of operations.
STRUCTURE OF THE BOARD OF DIRECTORS
The bylaws provide for a board of directors of one to nine members. The
current board of directors consists of seven members. We are contemplating
adding one additional independent director or replacing one of our existing
directors with an independent director following this offering, although no
individual has been identified as of the date of this prospectus. All newly
elected directors will serve for a three year term and approximately one-third
of the directors will be elected annually. We have established an Audit
Committee and Compensation Committee, each of which have only independent
directors. The Audit Committee will review the professional services provided by
our independent auditors, our annual financial statements and our system of
internal controls. Our Audit Committee currently consists of Messrs. Green,
Peelle and Hail. The Compensation Committee will review executive salaries and
administer our bonus, incentive compensation and stock option plans. In
addition, the Compensation Committee will consult with our management regarding
our compensation policies and practices. The Compensation Committee currently
consists of Messrs. Hail and Peelle.
DIRECTOR COMPENSATION
Directors are reimbursed for reasonable expenses incurred in attending
meetings. During the first three months of 1999, we also paid to Mr. Webb a
$21,630 referral fee in connection with shares of common stock sold by us.
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<PAGE> 35
EXECUTIVE COMPENSATION
The following table provides summary information concerning compensation
paid to our Chief Executive Officer. The All Other Compensation column includes
payments received by VanDun, LLC, of which Mr. R. Terren Dunlap is a 50% owner.
No executive officer who was serving as an executive officer on December 31,
1998 had an aggregate salary and bonus exceeding $100,000 for the fiscal year
ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
------------------ ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
R. Terren Dunlap.................. 1998 $72,000 -- -- -- $780
Chief Executive Officer 1997 $58,154 $10,000 -- -- --
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No executive officer named in the Summary Compensation Table received stock
option grants during the fiscal year ended December 31, 1998.
FISCAL YEAR-END OPTION VALUES
No executive officer named in the Summary Compensation Table had options
outstanding as of December 31, 1998 nor exercised any options during the fiscal
year ended December 31, 1998.
STOCK OPTION PLANS
Our 1997 stock option plan was adopted by the board of directors and
approved by our stockholders effective as of May 1, 1997. Our 1999 stock option
plan was adopted by the board of directors and approved by our stockholders
effective as of March 8, 1999. Both plans authorize the board of directors or a
Compensation Committee of the board to grant stock options to employees,
directors and appropriate third parties. Under the 1997 plan, 823,535 shares are
authorized for issuance, and under the 1999 plan, 235,294 shares are authorized
for issuance. Under both plans, the exercise price is determined by the board of
directors or the compensation committee. The plans provide for the granting of
either "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, or nonqualified stock options. Incentive stock
options may be granted only to employees, including officers. The exercise price
of incentive stock options granted under the plans must be at least the fair
market value of the common stock on the date of grant. The exercise price of any
incentive stock option granted to an optionee who beneficially owns more than
10% of our voting stock must be at least 110% of the fair market value of the
underlying shares on the date of grant. The exercise price of nonqualified stock
options may be any amount determined in good faith by the board of directors or
the Compensation Committee. All outstanding options that we have granted under
the plans have exercise prices at least equal to the fair market value of the
common stock on the dates of grant, and we intend to continue this policy with
respect to future option grants.
No option may be exercised more than 10 years, or, in the case of an
incentive stock option granted to a 10% holder, more than five years, after its
grant date. Options granted under the plans are not transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by the optionee, or his or
her guardian or legal representative. Incentive stock options held by our
employees may be exercised by the participant only:
- while employed by us,
- within one year following termination resulting from death or permanent
disability,
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<PAGE> 36
- within three months after termination for any reason other than cause,
death or permanent disability, or
- or on or before the date the participant's employment with us is
terminated, if for cause.
Nonqualified stock options may be exercised:
- within one year after cessation of services to us for any reason other
than death, permanent disability, retirement or cause,
- within two years after cessation of services by reason of death,
permanent disability or retirement, or
- on or before the date of cessation of services for cause.
The 1997 plan expires in 2007, and the 1999 plan expires in 2009. As of
July 31, 1999, options to purchase 733,530 shares were outstanding under the
1997 plan, and options to purchase 28,941 shares were outstanding under the 1999
plan.
EMPLOYMENT AND SEVERANCE AGREEMENTS
In May 1997, we entered into a seven-year employment agreement with Mr.
Dunlap providing that Mr. Dunlap will serve as our Chief Executive Officer at a
base salary of $72,000, increasing after 18 months to a level commensurate with
industry standards and our ability to pay.
In May 1997, we entered into a seven-year employment agreement with Mr.
Anthony Van Zeeland providing that Mr. Van Zeeland will serve as our Chief
Operating Officer at a base salary of $72,000, increasing after 18 months to a
level commensurate with industry standards and our ability to pay. We have also
agreed to pay Mr. Van Zeeland an annual one-time bonus of $5,000 for each United
States patent, and $1,000 for each foreign patent issued in his name as inventor
or co-inventor, with a maximum of $20,000 during any fiscal year.
In November 1998, we entered into a three-year employment agreement with
Mr. Brilon providing that Mr. Brilon will serve as our President and Chief
Financial Officer at a base salary of $75,000, increasing after December 31,
1998 to $95,000 or a level commensurate with industry standards, based on Mr.
Brilon's performance and our ability to pay. In addition, Mr. Brilon receives an
automobile allowance. Mr. Brilon is also entitled to receive an incentive profit
sharing bonus each year of 5% of our net profit before tax, goodwill
amortization and other non-cash charges. On November 20, 1998 we issued stock
options to Mr. Brilon to purchase 176,472 shares of common stock, which vest as
follows:
- 58,824 on December 31, 1998,
- 58,824 on December 31, 1999, and
- 58,824 on December 31, 2000.
In November 1998, we entered into an employment agreement with Mr. Webb
providing that, commencing on November 20, 1998 and continuing until January 1,
2000, Mr. Webb will serve on a part-time basis as our Executive Vice President
of Marketing at a base salary equal to $26,000. On November 20, 1998, we issued
stock options to Mr. Webb to purchase 65,882 shares of common stock, which vest
as follows:
- 28,235 on January 1, 1999,
- 18,824 on January 1, 2000, and
- 18,823 on January 1, 2001.
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<PAGE> 37
SEVERANCE AND CHANGE OF CONTROL PROVISIONS
Each of the employment agreements described above provide for benefits to
our executive officers upon their severance or upon a change of control of
DuraSwitch. If we terminate any of these individuals, with or without cause, we
would be required to pay him his gross annual base salary and continue all
standard employee benefits for an additional two year period after termination.
In addition, in the case of Mr. Brilon, all stock options held but not vested
would vest immediately. If Mr. Dunlap or Mr. Van Zeeland leaves voluntarily, we
have agreed to pay him his gross annual base salary and continue to provide all
standard employee benefits for an additional 18 months after termination. If Mr.
Brilon leaves voluntarily, we have agreed to pay him his gross annual base
salary and continue to provide standard employee benefits for an additional 12
months after termination. Each of these executive officers have agreed that they
will not, for the two year period following his termination, or in the case of
Mr. Dunlap and Mr. Van Zeeland, for the one year period following termination,
compete with us within the United States.
In the event that we are acquired and the executive officer is terminated
as a result of the takeover, we have agreed to make a lump sum payment to the
executive officer equal to 2.99 times his gross annual salary. In addition, in
the case of Mr. Brilon, all stock options held but not vested would vest
immediately.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1997, Mr. R. Terren Dunlap, our Chief Executive Officer, and Mr.
Anthony J. Van Zeeland, our Chief Operating Officer, formed an Arizona
corporation known as Total Switch, Inc. In connection with the formation of
Total Switch, Mr. Dunlap and Mr. Van Zeeland each received shares of common
stock representing a 49.5% equity interest in Total Switch and Mr. Michael Van
Zeeland, Mr. Anthony J. Van Zeeland's son, and Mr. Rhett Dunlap, Mr. R. Terren
Dunlap's son, each received shares of common stock representing a 0.5% equity
interest in Total Switch. These individuals contributed a nominal amount of
capital for Total Switch's initial capitalization. In addition, Mr. A. Van
Zeeland assigned to Total Switch his continuing rights in the patents for his
switch technology, and Total Switch issued a note payable to creditors of Mr. A.
Van Zeeland in the amount of $20,569 to satisfy loans made to Mr. A. Van Zeeland
to cover the costs of filing the patents for his switch technology.
On May 1, 1997, we granted Mr. Brilon 22,883 options to purchase common
stock at an exercise price of $0.02 per share and 1,525 shares of common stock
for financial and accounting consulting services.
We have entered into an employment agreement with Mr. A. Van Zeeland. Under
this agreement, Mr. A. Van Zeeland was granted options to purchase 83,903 shares
of common stock at fair market value, which were immediately exercised at $0.02
per share.
On May 1, 1997, we entered into an agreement with VanDun, LLC, a limited
liability company wholly-owned by Mr. A. Van Zeeland and Mr. R. Terren Dunlap,
under which VanDun provides intellectual property consulting services to us. The
agreement requires us to pay VanDun a management fee equal to 1.1% of invoiced
sales for all component switches and integrated component switch panels sold by
us during the term of this agreement. The agreement terminates upon the
expiration of our patents in approximately 20 years. In fiscal 1998 we paid
VanDun $780. This agreement obligates Messrs. A. Van Zeeland and R. T. Dunlap to
preserve all their personal notes and records regarding our intellectual
property and to assist us in protecting our intellectual property from
infringement, including testifying during legal or administrative proceedings.
These duties extend beyond the terms of Messrs. A. Van Zeeland's and R. T.
Dunlap's employment agreements and noncompetition covenants.
On June 29, 1998, we issued shares of Series A Preferred Stock convertible
into 504,311 shares of our common stock, together with warrants to purchase
252,155 additional shares of common stock, to Blackwater Capital Partners, L.P.
and another entity controlled by Blackwater. Blackwater purchased these
securities for a total payment of $1,000,000. As part of this transaction, we
granted registration rights to Blackwater with respect to all of the common
stock issuable upon exercise or conversion of the preferred stock and warrants.
On December 31, 1998, Blackwater converted all of their shares of preferred
stock into
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<PAGE> 38
504,311 shares of our common stock. Steven R. Green, a director of DuraSwitch,
is the managing director of Blackwater.
On November 1, 1998, we entered into a consulting agreement with Mr. Brilon
for financial and management services. Under this agreement, Mr. Brilon received
$1,380 and warrants to purchase 47,059 shares of common stock at $3.19 per
share. The agreement was terminated on November 20, 1998 when Mr. Brilon became
our full-time employee.
On January 15, 1999, we borrowed $100,000 from Blackwater Capital Partners,
L.P. The loan accrued interest at an annual rate of 9%. On April 30, 1999,
Blackwater exercised warrants to purchase 126,077 shares of common stock. As
payment for the exercise price, Blackwater agreed to cancel our $100,000 loan
and executed a note payable to us in the amount of $147,263. This note bears
interest at 8% per year and is payable on the earlier of the completion of this
offering or December 31, 1999.
During the first quarter of 1999, we loaned $150,000 to Camplex/Concept W
Corporation, an entity that we had considered as a possible acquisition
candidate. Subsequent to March 31, 1999, we determined that we would not acquire
Camplex. The $150,000 loan is due January 1, 2000, and bears interest at 9% per
year. J. Thomas Webb, one of our directors, is the CEO, Chairman of the Board
and a major stockholder of Camplex.
Based on a prior relationship of Anthony J. Van Zeeland, the inventor of
our technology, with his prior employer, we granted to that employer a
nonexclusive license to manufacture products using our technology. Because we
may unilaterally cancel the license in April 2000, we do not believe this
licensing arrangement will materially affect our business.
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<PAGE> 39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock by:
- each person or entity known to us to own beneficially more than 5% of the
outstanding shares of common stock,
- each of our directors, and
- all our directors and executive officers as a group,
as of July 31, 1999 and as adjusted to reflect the sale of the common stock
offered in this offering.
Shares beneficially owned and percentage of ownership are based on
5,495,407 shares of common stock outstanding immediately prior to the offering
and 8,495,407 shares of common stock outstanding immediately after the offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. In accordance with SEC rules, shares which may
be acquired upon exercise of stock options or warrants which are currently
exercisable or which become exercisable within 60 days of the date of the table
are deemed beneficially owned by the holder. Except as indicated by footnote,
and subject to community property laws where applicable, the persons or entities
named in the table below have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them.
Except as otherwise noted, the mailing address of each of the stockholders
in the table below is 234 S. Extension Road, Mesa, Arizona 85210.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------------------------
PERCENT PRIOR PERCENT AFTER
IDENTITY OF STOCKHOLDER OR GROUP NUMBER TO OFFERING OFFERING
- -------------------------------- ---------- ------------- -------------
<S> <C> <C> <C>
R. Terren Dunlap...................................... 1,447,506 26.3% 17.0%
Anthony J. Van Zeeland................................ 1,447,506 26.3 17.0
Robert J. Brilon...................................... 130,290(1) 2.3 1.5
Steven R. Green....................................... 442,153(2) 8.0 5.2
John W. Hail.......................................... 5,624(3) 0.1 0.1
J. Thomas Webb........................................ 28,235(4) 0.5 0.3
Michael A. Van Zeeland................................ 15,255 0.3 0.2
William E. Peelle..................................... 15,863 0.3 0.2
All directors and executive officers as a group (8
persons)............................................ 3,532,432 62.5% 40.8%
</TABLE>
- ---------------
(1) Includes (i) 81,706 shares subject to options which are currently
exercisable, and (ii) 47,059 shares subject to warrants which are currently
exercisable.
(2) Represents 442,153 shares owned by Blackwater Capital Partners L.P., of
which Steven R. Green, one of our directors, is managing partner.
Blackwater's mailing address is 1800 Glenview Road, Glenview, Illinois
60025. Blackwater may sell up to 74,266 shares to the underwriters as part
of the over-allotment option. If the underwriters fully exercise the
over-allotment option, Blackwater will own 367,887 shares of common stock
after the offering, which will be 4.1% of our total issued and outstanding
shares following the offering.
(3) Includes 3,741 shares owned by TVC, Inc., of which John W. Hail is the
majority shareholder.
(4) Includes 28,235 shares subject to options which are currently exercisable.
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<PAGE> 40
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. Cruttenden Roth Incorporated is acting as representative of the
underwriters. The underwriting agreement provides for the purchase of a specific
number of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
set forth in the underwriting agreement, each underwriter has agreed to purchase
the number of shares of common stock set forth opposite each underwriter's name
below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Cruttenden Roth Incorporated................................
---------
Total.................................................. 3,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to a number of conditions, including the absence of any
material adverse change in our business and the receipt of certificates,
opinions and letters from our counsel and independent public accountants. The
underwriters are committed to purchase and pay for all the shares of common
stock if any are purchased.
We have granted an option to the underwriters, exercisable for a period of
45 days after the date of this prospectus, to purchase up to an additional
375,734 shares of our common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discounts and commissions.
Blackwater Capital Partners, L.P., the selling stockholder, has granted an
option to the underwriters to purchase an additional 74,266 shares of our common
stock on the same terms and conditions. The underwriters may exercise this
option only to cover over-allotments, if any. To the extent that the
underwriters exercise this option, each of the underwriters will be committed,
subject to the terms and conditions set forth in the underwriting agreement, to
purchase the additional shares of common stock in approximately the same
proportion as set forth in the table above.
We have been advised by the representative that the underwriters propose to
offer the shares of common stock directly to the public at the public offering
price set forth on the cover page of this prospectus and to selected securities
dealers at that price less a concession not in excess of $ per share.
The underwriters may allow, and those selected dealers may reallow, a discount
not in excess of $ per share to other brokers and dealers. After the
public offering of the shares, the public offering price and other selling terms
may be changed by the representative. No change in these terms will change the
amount of proceeds to be received by us as set forth on the cover page of this
prospectus.
The representative has advised us that it does not expect any sales of the
shares of common stock offered by this prospectus to be made to discretionary
accounts controlled by the underwriters.
In connection with this offering, we have agreed to issue the
representative a warrant to purchase up to 300,000 shares of our common stock.
The representative's warrant will have a term of five years and will be
exercisable commencing one year after the effective date of this offering, at an
exercise price per share of 165% of the initial price of the common stock being
offered to the public. The representative's warrant may not be sold,
transferred, assigned, pledged or hypothecated, except in limited circumstances.
During the exercise period, the holders of the representative's warrant are
entitled to limited demand and incidental registration rights which will expire
five years after the date of this prospectus and which may require us to
register for public resale the shares of common stock issuable under the
warrant. The number of shares covered by the representative's warrant and the
exercise price of the warrant are subject to adjustment to prevent dilution.
36
<PAGE> 41
We have also agreed to pay the representative a non-accountable expense
allowance equal to 2% of the aggregate public offering price of the shares of
common stock sold in the offering. The representative's expenses in excess of
the non-accountable expense allowance, including its legal expenses, will be
borne by the representative. To the extent that the expenses of the
representative are less than the non-accountable expense allowance, the excess
will be considered compensation to the representative.
In total, we will pay compensation to the representative and the
underwriters as follows:
- commission of $ per share of common stock sold;
- nonaccountable expense allowance of $ per share of common stock
sold; and
- warrants to purchase up to 300,000 shares of common stock at 165% of the
per share offering price.
The public offering price for the common stock will be arbitrarily
determined by negotiation between us and the representative. In determining the
public offering price, consideration will be given to various factors,
including:
- market conditions for the public offering,
- the past history of and prospects for our business, operations, earnings
and financial position,
- an assessment of our management,
- the market for securities of companies in businesses similar to ours,
- the general condition of the securities markets, and
- other relevant factors.
There can be no assurance that the public offering price will correspond to
the price at which the common stock traded prior to this offering or will trade
in the public market subsequent to the offering or that an active trading market
will develop and continue after the offering.
Our executive officers, directors and shareholders beneficially owning more
than 5% of our outstanding commons stock have agreed that they will not, without
the prior written consent of the representative, directly or indirectly, offer,
sell or otherwise dispose of any shares of common stock, or any security which
may be converted into or exchanged for any shares of common stock, for a period
of 180 days after the date of completion of this offering. The representative,
on behalf of the underwriters, may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. In addition, we have agreed that, for a period of 180 days
after the date of completion of this offering, we will not, without the consent
of the representative, make any offering, purchase, sale or other disposition of
any shares of our common stock or other securities convertible into or
exchangeable or exercisable for shares of common stock. This limitation does not
apply to the grant of options to purchase shares of common stock under our stock
option plans and the issuance of shares of common stock issued pursuant to the
exercise of options granted under the plans.
The representative has advised us that, under Regulation M under the
Securities Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market.
- A "stabilizing bid" is a bid for or the purchase of shares of common
stock on behalf of the underwriters for the purpose of fixing or
maintaining the price of the common stock.
- A "syndicate covering transaction" is a bid for or purchase of common
stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with the offering.
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<PAGE> 42
- A "penalty bid" is an arrangement permitting the representative to
reclaim the selling concession otherwise accruing to an underwriter or
syndicate member in connection with the offering if the common stock
originally sold by that underwriter or syndicate member is purchased by
the representative in a syndicate covering transaction and has therefore
not been effectively placed by that underwriter or syndicate member.
The representative has advised us that such transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time. Neither DuraSwitch nor the underwriters make any representation or
prediction as to the effect that the transactions described above may have on
the price of the shares.
The underwriting agreement provides that we and the selling stockholder
will indemnify the underwriters and their controlling persons against
liabilities under the Securities Act or will contribute to payments the
underwriters and their controlling persons may be required to make.
The foregoing is a summary of the principal terms of the underwriting
agreement. This summary is not complete and is qualified in its entirety by
reference to the form of underwriting agreement that is filed as an exhibit to
our registration statement of which this prospectus is a part.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 40,000,000 shares of common stock,
par value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share. The following summary of provisions of our capital stock is
not complete and is subject to, and qualified in its entirety by, the provisions
of our articles of incorporation and bylaws which are included as exhibits to
the registration statement of which this prospectus is a part, and by the
provisions of applicable law.
COMMON STOCK
Immediately prior to the offering, there were 5,495,407 shares of common
stock outstanding which were held of record by approximately 300 stockholders.
The holders of common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Stockholders are not entitled to cumulate
their votes for the election of directors. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, the holders of common
stock are entitled to receive dividends pro rata, if any, as may be declared
from time to time by the board of directors out of funds legally available for
that purpose. In the event of our liquidation, dissolution or winding up, the
holders of common stock are entitled to share pro rata in all assets remaining
after payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common stock
to be issued upon completion of this offering will be fully paid and
nonassessable.
PREFERRED STOCK
Subject to the provisions of our articles of incorporation and the
limitations mandated by law, we are authorized to issue 10,000,000 shares of
preferred stock, 2,143,321 of which are designated Series A Convertible
Preferred Stock and the remainder of which are undesignated preferred stock. The
board of directors has the authority to issue the undesignated preferred stock
in one or more series and to determine the powers, preferences and rights and
the qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series of undesignated preferred stock and to fix the number of
shares constituting any series and the designation of the series, without any
further vote or action by the stockholders. Shares of preferred stock so
designated may have voting, conversion, liquidation preference, redemption,
sinking fund provisions and other rights which are superior to those of the
common stock. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of
38
<PAGE> 43
DuraSwitch without further action by the stockholders, may discourage bids for
the common stock at a premium over the market price of the common stock and may
adversely affect the market price of and the voting and other rights of the
holders of common stock.
At present, we have no shares of preferred stock issued and outstanding.
WARRANTS AND OPTIONS
As of July 31, 1999, we had outstanding warrants to purchase 89,929 shares
of our common stock, all of which were exercisable. Of these warrants, warrants
to purchase 42,870 shares were exercisable at $1.98 per share and warrants to
purchase 47,059 shares were exercisable at $3.19 per share. Each warrant
contains provisions for the adjustment of the exercise price and the aggregate
number of shares issuable upon exercise of the warrant in the event of stock
dividends, stock splits, reorganizations, reclassifications and consolidations.
As of July 31, 1999, options to purchase 762,471 shares of common stock
were outstanding, 536,942 of which were exercisable.
ANTI-TAKEOVER PROVISIONS
Provisions of our articles of incorporation and bylaws and provisions of
applicable Nevada law may affect potential changes in control. The cumulative
effect of these provisions may be to make it more difficult to acquire and
exercise control and to make changes in management.
According to our articles of incorporation, the affirmative vote of at
least two-thirds of the directors present at any meeting of the board of
directors at which a quorum is present is required for:
- a sale of all or substantially all of our assets,
- a merger with another entity,
- an amendment of the bylaws,
- a dissolution, or
- a sale of all of our issued and outstanding stock.
Nevada law prohibits business combinations between Nevada corporations and
interested stockholders for a period of three years after the interested
stockholder's date of acquiring shares unless the combination or the purchase of
the shares by the interested stockholder is approved by the board of directors.
Applicable Nevada law also prohibits business combinations between Nevada
corporations and interested stockholders following the expiration of three years
after the interested stockholder's date of acquiring shares unless the
combination meets the requirements specified in Section 78.439 for director and
stockholder approvals or Sections 78.441 to 78.444 inclusive with respect to the
consideration to be received in the combination by all stockholders other than
the interested stockholder. Applicable Nevada law defines "interested
stockholders" to include persons who, alone or together with affiliates,
beneficially own at least 10% of the outstanding stock of the corporation. A
Nevada corporation may opt out of the application of these provisions, but we
have not opted out.
Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless the voting
rights are approved by a majority of the voting powers of the corporation. A
Nevada corporation may opt out of the application of these provisions, but we
have not opted out.
Nevada law does not require a stockholder vote of the surviving corporation
in a merger if:
- the merger does not amend the existing articles of incorporation,
- each outstanding share of the surviving corporation before the merger is
unchanged, and
39
<PAGE> 44
- the number of shares to be issued by the surviving corporation in the
merger does not exceed 20% of the shares outstanding immediately prior to
such issuance.
The effect of these provisions may be to make more difficult the
accomplishment of a merger or other takeover or change in control. To the extent
that these provisions have this effect, removal of our incumbent board of
directors and management may be rendered more difficult. Further, these
provisions may make it more difficult for stockholders to participate in a
tender or exchange offer for common stock and in so doing may diminish the
market value of the common stock.
PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
Nevada law authorizes a Nevada corporation to eliminate or limit the
personal liability of directors and officers to the corporation and its
stockholders for damages for breach of fiduciary duties as a director. We
believe that such a provision is beneficial in attracting and retaining
qualified directors and officers, and accordingly, our articles of incorporation
include a provision eliminating liability for damages for any breach of
fiduciary duty as a director or officer, except for:
- acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law; or
- authorizing an unlawful distribution in violation of Nevada law.
Directors are not insulated from liability for breach of their duty of
loyalty or for claims arising under the federal securities laws. These
provisions of our articles of incorporation may reduce the likelihood of
derivative litigation against directors for breaches of their fiduciary duties,
even though such an action, if successful, might otherwise have benefitted us
and our stockholders. We have comprehensive directors' and officers' liability
insurance coverage, with an aggregate policy limit of $2,000,000 for the benefit
of our officers and directors insuring them against various liabilities,
including liabilities under the securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons under these
provisions of our articles of incorporation, or otherwise, we have 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.
REGISTRATION RIGHTS
Holders of 756,466 shares of common stock and a holder of warrants to
acquire 47,059 shares of common stock have the right to receive notice of
proposed registrations of securities by us and to cause us to include all or a
portion of their shares in those registrations, provided, among other
conditions, that the underwriters of any registered offering will have the right
to limit the number of shares included in the registration. We are obligated to
pay the offering expenses of each such offering. Holders of applicable
registration rights have waived their rights to participate in this offering
with the exception of 74,266 shares of common stock in the over-allotment.
TRANSFER AGENT AND REGISTRAR
We have appointed American Securities Transfer & Trust, Inc., located in
Lakewood, Colorado, as the transfer agent and registrar for our common stock.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
REVERSE STOCK SPLIT
On August 17, 1999, we effected a 4.25 to one reverse stock split in which
we combined each 4.25 shares of our common stock into one share. The reverse
split had no effect on the number or par value of authorized shares of our
common stock or preferred stock. As a result, the number of shares of common
stock outstanding were reduced from 23,355,475 to 5,495,407 shares. One
additional share will be issued to any stockholder who otherwise would have held
a fraction of a share as a result of the reverse stock split.
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<PAGE> 45
All outstanding options and warrants that include provisions for
adjustments in their number of shares covered, and their exercise or conversion
price, automatically will be appropriately adjusted for the reverse split.
The reverse split was accomplished by amending our articles of
incorporation upon approval by our board and stockholders. We will be contacting
our existing stockholders of record to request that they exchange their current
stock certificates for certificates stating the new number of shares. However,
upon filing our amendment, each share of common stock was, automatically and
without any action on the part of the stockholders, converted into a lesser
number of shares of common stock at a ratio of 4.25 to one, as adjusted for any
fractional shares, as described above.
Until a stockholder forwards to the transfer agent a completed letter of
transmittal together with certificates representing shares of their pre-reverse
split common stock and receives a new certificate, the stockholder's pre-reverse
split common stock will be deemed equal to the number of shares of common stock,
rounded up to the nearest whole share in the case of fractional shares, to which
the stockholder is entitled as a result of the reverse split.
MARKET INFORMATION
Since January 1998, our common stock has traded on the OTC Bulletin Board
under the symbol "DSWT". In light of the limited trading market for our common
stock, approximately 375,000 shares, we believe our past trading prices are not
meaningful when evaluating the offering price. The high and low inter-dealer
prices, as adjusted for the 4.25 to 1 reverse stock split, for the calendar
quarters since trading began on the OTC Bulletin Board are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED HIGH LOW
- ------------ ------ ------
<S> <C> <C>
March 31, 1998.............................................. $24.44 $17.47
June 30, 1998............................................... $21.25 $12.75
September 30, 1998.......................................... $20.40 $12.75
December 31, 1998........................................... $14.88 $ 6.38
March 31, 1999.............................................. $ 9.56 $ 6.38
June 30, 1999............................................... $11.69 $ 8.23
</TABLE>
These bid prices are inter-dealer prices without retail markup, markdown or
commission, and may not represent actual transactions. The source for the bid
price information is www.financialweb.com/stocktools/.
We have applied for listing with the Nasdaq National Market under the
trading symbol "DSWT" by requesting a preliminary listing eligibility opinion.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market,
or the perception that these sales could occur, could adversely affect the
prevailing market price of our common stock. Upon completion of this offering,
there will be 8,495,407 shares of common stock outstanding. Of these shares, the
3,000,000 shares sold in this offering plus the approximately 375,000 shares
which formerly traded on the OTC Bulletin Board will be freely transferable
without restriction or further registration under the Securities Act, except for
shares owned by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining 5,120,407 shares of common stock outstanding will
be "restricted securities," as that term is defined in Rule 144, and may in the
future be sold without registration under the Securities Act to the extent
permitted by Rule 144 or any applicable exemption under the Securities Act.
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<PAGE> 46
In general, under Rule 144 of the Securities Act as currently in effect, a
person who has beneficially owned "restricted securities" for at least one year
is entitled to sell within any three month period a number of shares of common
stock that does not exceed the greater of:
- 1% of the then outstanding shares of our common stock, or 84,954
shares after giving effect to this offering, and
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are subject to restrictions relating to manner of
sale, notice and the availability of current public information about
DuraSwitch. A person who has beneficially owned shares for at least two years
and who has not been an affiliate of DuraSwitch at any time during the 90 days
preceding a sale would be entitled to sell such shares without regard to the
volume limitations, manner of sale provisions or notice or other requirements of
Rule 144.
Officers, directors and beneficial owners of more than 5% of our
outstanding common stock that own an aggregate of 3,689,745 shares of common
stock and warrants and options to purchase 312,295 shares of common stock have
agreed with the underwriters not to sell or otherwise dispose of any shares of
common stock for a period of 180 days after the date of this prospectus without
the prior written consent of the underwriters.
Prior to the expiration of the lock-up agreements with the underwriters, we
expect to file a registration statement on Form S-8 under the Securities Act to
register all of the shares of common stock reserved for issuance upon the
exercise of options issued under our 1997 and 1999 stock option plans. After the
effective date of that registration statement and the expiration of the lock-up
agreements, shares purchased upon exercise of options granted under the stock
option plans generally will be available for resale in the public market. As of
July 31, 1999, options to purchase 762,471 shares of common stock were
outstanding, 536,942 of which were exercisable. As of that date, 90,005 options
had been exercised.
Following completion of this offering, holders of 756,466 shares of common
stock and holders of warrants to acquire 47,059 shares of common stock will have
the right to cause us to register their shares under the Securities Act and to
participate in future registrations.
Prior to this offering, there has been only a small trading market for our
common stock, and no precise prediction can be made of the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of our common stock in the public market could adversely affect
prevailing market prices and limit our ability to raise additional capital.
HOLDERS
As of July 31, 1999, there were approximately 300 holders of record of our
common stock. We believe that our common stock is held by in excess of 400
beneficial holders.
INTEREST OF NAMED EXPERTS AND COUNSEL
Joel H. Bock, an attorney with the firm of Dorn, McEachran, Jambor &
Keating, who provides intellectual property-oriented legal services to us, owns
a total of 15,255 shares of common stock. We provided 7,628 of those shares to
Mr. Bock as partial payment for his firm's legal services. He purchased the
remaining shares on June 1, 1997 at $1.31 per share, which was the market price
at that time.
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<PAGE> 47
LEGAL MATTERS
The legality of the common stock offered by this prospectus will be passed
upon for us by our general counsel, Quarles & Brady LLP, Phoenix, Arizona. Legal
issues related to intellectual property matters are being passed upon for us by
Dorn, McEachran, Jambor & Keating, Chicago, Illinois. Legal matters regarding
underwriting related issues will be passed upon for the underwriters by Snell &
Wilmer L.L.P., Phoenix, Arizona.
EXPERTS
The financial statements of DuraSwitch Industries, Inc. as of December 31,
1998 and for the year then ended, and the financial statements of Aztec
Industries, Inc. as of January 31, 1998 and for the year then ended included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing in this prospectus, and are so
included in reliance upon the reports of that firm given upon their authority as
experts in accounting and auditing. The financial statements of DuraSwitch
Industries, as of December 31, 1997 and the period then ended included in this
prospectus have been audited by McGladrey & Pullen LLP, independent auditors, as
stated in their reports appearing in this prospectus, and are included in
reliance upon the reports of that firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
DuraSwitch has filed with the Commission, 450 Fifth Street N.W.,
Washington, D.C. 20549, a registration statement under the Securities Act
concerning the common stock offered by this prospectus. Certain portions of the
registration statement have not been included in this prospectus as permitted by
the Commission's regulations. For further information concerning DuraSwitch and
the shares of common stock offered by this prospectus, see the registration
statement and its exhibits, which may be inspected at the offices of the
Commission, without charge. Copies of the material contained in the registration
statement and its exhibits may be obtained from the Commission upon payment of
the prescribed fees. Statements contained in this prospectus as to the contents
of any contract or other documents are not necessarily complete. Where the
contract or other document is an exhibit to the registration statement, each
such statement is qualified in all respects by the provisions of the exhibit, to
which reference is hereby made for a full statement of the provisions of the
exhibit.
After completion of this offering, DuraSwitch will be subject to the
informational requirements of the Securities Exchange Act of 1934 and, in
accordance with the Exchange Act, will file reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information may be read and copied at public reference facilities of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549; and at the regional
offices maintained by the Commission at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; 7 World Trade Center, 13th Floor, New York, New York
10048; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of
these materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates.
Additionally, the Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. You may obtain
information on the operation of the SEC's public reference facilities by calling
the SEC at 1-800-SEC-0330.
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<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DURASWITCH INDUSTRIES, INC.
Independent Auditors' Reports............................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
1997 and June 30, 1999 (Unaudited)..................... F-4
Consolidated Statements of Operations Period from May 1,
1997 (Date of Inception) to December 31, 1997, Year
Ended December 31, 1998 and Six Months Ended June 30,
1998 and 1999 (Unaudited).............................. F-5
Consolidated Statements of Stockholders' Equity Period
from May 1, 1997 (Date of Inception) to December 31,
1997, Year Ended December 31, 1998 and Six Months Ended
June 30, 1998 and 1999 (Unaudited)..................... F-6
Consolidated Statements of Cash Flows Period from May 1,
1997 (Date of Inception) to December 31, 1997, Year
Ended December 31, 1998 and Six Months Ended June 30,
1998 and 1999 (Unaudited).............................. F-7
Notes to Consolidated Financial Statements................ F-9
AZTEC INDUSTRIES, INC.
Independent Auditors' Report................................ F-20
Financial Statements:
Balance Sheet as of January 31, 1998...................... F-21
Statement of Operations Year Ended January 31, 1998....... F-22
Statement of Stockholders' Capital Deficiency Year Ended
January 31, 1998....................................... F-23
Statement of Cash Flows Year Ended January 31, 1998....... F-24
Notes to Financial Statements............................. F-25
</TABLE>
F-1
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
Board of Directors
DuraSwitch Industries, Inc.
Mesa, Arizona
We have audited the accompanying consolidated balance sheet of DuraSwitch
Industries, Inc. and subsidiaries (the "Company") as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity, 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. The financial
statements of the Company for the period from May 1, 1997 (date of inception) to
December 31, 1997 were audited by other auditors whose report, dated October 1,
1998, expressed an unqualified opinion on those statements.
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, such 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company at December 31,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The Company was in the development stage at December 31, 1997. During the
year ended December 31, 1998, the Company completed its development activities
and commenced its planned principal operations.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 26, 1999, except for Note 2, as to which the date is August 17, 1999
F-2
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
Board of Directors
DuraSwitch Industries, Inc.
(A Development Stage Company)
Mesa, Arizona
We have audited the accompanying balance sheet of DuraSwitch Industries,
Inc. (A Development Stage Company) as of December 31, 1997, and the related
statements of operations, stockholders' equity, and cash flows for the period
from May 1, 1997 (date of inception) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DuraSwitch Industries, Inc.
(A Development Stage Company) as of December 31, 1997, and the results of its
operations and its cash flows for the period from May 1, 1997 (date of
inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
MCGLADREY & PULLEN, LLP
Phoenix, Arizona
October 1, 1998
F-3
<PAGE> 51
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998, AND JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999
--------- ----------- -------------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 235,981 $ 143,860 $ 109,516
Accounts receivable (net of allowance for doubtful
accounts of $9,346 at December 31, 1998 and June
30, 1999)......................................... 5,762 136,078 204,887
Loan to Camplex / Concept W Corporation.............. 150,000
Inventory............................................ 235,567 408,938
Prepaid expenses and other current assets............ 16,955 76,640 66,689
--------- ----------- -----------
Total current assets.............................. 258,698 592,145 940,030
Property and equipment -- net.......................... 60,337 167,672 403,030
Goodwill -- net........................................ 662,767 626,288
Deferred offering costs................................ 303,928
Patents and other assets............................... 60,880 105,246 86,810
--------- ----------- -----------
Total assets........................................... $ 379,915 $ 1,527,830 $ 2,360,086
========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 23,957 $ 221,243 $ 407,631
Accrued expenses and other current liabilities....... 19,568 223,331 446,540
Line of credit....................................... 158,670
Loans from officers.................................. 11,898 40,281
Current portion of notes payable and capital leases
payable........................................... 132,985 122,160
--------- ----------- -----------
Total current liabilities......................... 55,423 617,840 1,135,001
--------- ----------- -----------
Long-term debt:
Notes payable........................................ 107,701 208,129
Capital leases payable............................... 50,014 79,571
--------- ----------- -----------
Total long-term liabilities....................... 157,715 287,700
--------- ----------- -----------
Total liabilities................................. 55,423 775,555 1,422,701
--------- ----------- -----------
Commitments and contingencies (Notes 1 and 14)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding
Common stock, $.001 par value, 40,000,000 shares
authorized, 4,138,609 and 4,911,250 and 5,495,407
shares issued and outstanding, respectively....... 4,139 4,911 5,496
Common stock paid for but not issued (32,424
shares)........................................... 260,000
Additional paid-in capital........................... 509,439 3,535,878 5,071,951
Accumulated deficit.................................. (449,086) (2,788,514) (3,992,799)
Promissory note receivable........................... (147,263)
--------- ----------- -----------
Total stockholders' equity........................ 324,492 752,275 937,385
--------- ----------- -----------
Total liabilities and stockholders' equity............. $ 379,915 $ 1,527,830 $ 2,360,086
========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 52
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997
(DATE OF SIX MONTHS
INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------------
1997 1998 1998 1999
------------- ------------ ------------ -----------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C> <C>
Net sales............................... $ 5,762 $ 1,354,790 $ 680,466 $ 857,780
Cost of goods sold...................... 6,617 1,300,190 640,119 1,002,606
--------- ----------- ------------ -----------
Gross (loss) profit................ (855) 54,600 40,347 (144,826)
--------- ----------- ------------ -----------
Operating expenses:
Selling, general and administrative... 309,951 1,194,905 483,619 807,423
Research and development.............. 142,550 409,425 183,583 251,113
--------- ----------- ------------ -----------
Total operating expenses........... 452,501 1,604,330 667,202 1,058,536
--------- ----------- ------------ -----------
Loss from operations.................... (453,356) (1,549,730) (626,855) (1,203,362)
Other income (expense) -- net........... 4,270 (49,698) (18,025) (923)
--------- ----------- ------------ -----------
Net loss................................ (449,086) (1,599,428) (644,880) (1,204,285)
--------- ----------- ------------ -----------
Noncash discount on proceeds of
preferred stock for beneficial
conversion feature.................... (740,000) (740,000)
--------- ----------- ------------ -----------
Net loss attributable to common stock... $(449,086) $(2,339,428) $ (1,384,880) $(1,204,285)
========= =========== ============ ===========
Net loss per common share, basic and
diluted............................... $ (.12) $ (.55) $ (0.33) $ (0.22)
========= =========== ============ ===========
Weighted average shares outstanding,
basic and diluted..................... 3,786,898 4,268,642 4,219,096 5,390,206
========= =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 53
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM MAY 1, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997,
YEAR ENDED DECEMBER 31, 1998 AND
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
PAID FOR
COMMON STOCK BUT NOT ISSUED PREFERRED STOCK PROMISSORY ADDITIONAL
--------------------- ------------------- -------------------- NOTE PAID IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL
--------- --------- ------- --------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK...... 470,588 $ 60,000
Effect of 6.4834 for 1 stock
split...................... 2,580,424
Effect of reverse merger
accounted for as a
recapitalization........... 620,792
Stock options exercised...... 83,903 1,650
Issuance of stock for cash... 305,101 $ 388,444
Issuance of stock for
services................... 32,036 1,989 45,765 60,000
Conversion of preferred stock
to common stock............ 350,866 448,444 (350,866) (448,444)
Cash for stock not issued.... 32,424 $ 260,000
Recapitalization due to
change in par value........ (507,944) $ 507,944
Compensation expense from
stock options.............. 1,495
Net loss.....................
--------- --------- ------- --------- -------- --------- --------- ----------
BALANCE, DECEMBER 31, 1997.... 4,138,609 4,139 32,424 260,000 -- -- 509,439
Issuance of stock for cash
previously received........ 32,424 32 (32,424) (260,000) 259,968
Issuance of stock for
acquisition of Aztec
Industries, Inc............ 70,588 71 566,929
Net proceeds from sale of
common stock for cash...... 143,451 143 533,608
Net proceeds from sale of
preferred stock and common
stock warrants............. 504,311 740,000 883,085
Issuance of stock for
services................... 15,765 16 41,826
Stock options exercised...... 6,102 6 124
Compensation expense from
stock options.............. 1,403
Conversion of preferred stock
to common stock............ 504,311 504 (504,311) (740,000) 739,496
Net loss.....................
--------- --------- ------- --------- -------- --------- --------- ----------
BALANCE, DECEMBER 31, 1998.... 4,911,250 4,911 3,535,878
Net proceeds from sale of
common stock (unaudited)... 305,805 306 955,280
Stock warrant exercised
(unaudited)................ 275,685 276 $(147,263) 565,995
Issuance of stock for
services (unaudited)....... 2,667 3 8,497
Compensation expense from
stock options
(unaudited)................ 6,301
Net loss (unaudited).........
--------- --------- ------- --------- -------- --------- --------- ----------
BALANCE, JUNE 30, 1999
(UNAUDITED).................. 5,495,407 $ 5,496 -- $ -- -- $ -- $(147,263) $5,071,951
========= ========= ======= ========= ======== ========= ========= ==========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----------
<S> <C> <C>
ISSUANCE OF COMMON STOCK...... $ 60,000
Effect of 6.4834 for 1 stock
split......................
Effect of reverse merger
accounted for as a
recapitalization...........
Stock options exercised...... 1,650
Issuance of stock for cash... 388,444
Issuance of stock for
services................... 61,989
Conversion of preferred stock
to common stock............
Cash for stock not issued.... 260,000
Recapitalization due to
change in par value........
Compensation expense from
stock options.............. 1,495
Net loss..................... $ (449,086) (449,086)
----------- -----------
BALANCE, DECEMBER 31, 1997.... (449,086) 324,492
Issuance of stock for cash
previously received........
Issuance of stock for
acquisition of Aztec
Industries, Inc............ 567,000
Net proceeds from sale of
common stock for cash...... 533,751
Net proceeds from sale of
preferred stock and common
stock warrants............. (740,000) 883,085
Issuance of stock for
services................... 41,842
Stock options exercised...... 130
Compensation expense from
stock options.............. 1,403
Conversion of preferred stock
to common stock............
Net loss..................... (1,599,428) (1,599,428)
----------- -----------
BALANCE, DECEMBER 31, 1998.... (2,788,514) 752,275
Net proceeds from sale of
common stock (unaudited)... 955,586
Stock warrant exercised
(unaudited)................ 419,008
Issuance of stock for
services (unaudited)....... 8,500
Compensation expense from
stock options
(unaudited)................ 6,301
Net loss (unaudited)......... (1,204,285) (1,204,285)
----------- -----------
BALANCE, JUNE 30, 1999
(UNAUDITED).................. $(3,992,799) $ 937,385
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 54
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997
(DATE OF SIX MONTHS
INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1997 1998 1998 1999
------------- ------------ --------- -----------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(449,086) $(1,599,428) $(644,880) $(1,204,285)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 18,868 131,169 58,343 95,602
Gain on sale of equipment................ 700 (12,500)
Stock option compensation expense........ 1,495 1,403 16,330 6,301
Issuance of stock for services........... 61,989 41,842 8,500
Bad debt expense......................... 59,797 11,033 5,505
Changes in operating assets and
liabilities net of the effects of
acquisition:
Accounts receivable.................... (5,762) 16,507 (33,999) (68,809)
Inventory.............................. 114,046 188,677 (173,371)
Prepaid expenses and other current
assets.............................. 21,447 (54,551) (15,557) (268,424)
Accounts payable....................... 23,957 (26,735) (74,383) 186,388
Accrued expenses and other current
liabilities......................... 6,568 128,890 35,310 223,209
--------- ----------- --------- -----------
Net cash used in operating
activities.......................... (260,727) (1,235,824) (463,954) (1,207,389)
--------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in patents and other
assets................................... (9,330) (61,434) (22,461) (18,155)
Advances to Aztec
Industries, Inc. ........................ (59,797) 58,246 (58,246)
Loan to Camplex............................. (150,000)
Proceeds from sale of equipment............. 12,500
Purchases of property and equipment......... (35,400) (60,515) (30,362) (225,570)
--------- ----------- --------- -----------
Net cash used in investing
activities.......................... (104,527) (180,195) (111,069) (381,225)
--------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock............. 650,094 1,416,966 390,571 1,199,594
Principal payments on notes payable and
capital leases........................... (80,451) (31,782) (63,713)
Proceeds from notes payable to
stockholder.............................. 300,000
Net (decrease) increase in line of credit... (41,000) 8,000 158,670
Net change in loans from officers........... (48,859) 28,383 9,680 (40,281)
--------- ----------- --------- -----------
Net cash provided by financing
activities.......................... 601,235 1,323,898 376,469 1,554,270
--------- ----------- --------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 235,981 (92,121) (198,554) (34,344)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD...................................... 235,981 235,981 143,860
--------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD...... $ 235,981 $ 143,860 $ 37,427 $ 109,516
========= =========== ========= ===========
</TABLE>
(Continued)
F-7
<PAGE> 55
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997
(DATE OF SIX MONTHS
INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1997 1998 1998 1999
------------- ------------ --------- ---------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION --
Cash paid for interest....................... $ 58,970 $ 24,818 $ 34,944
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Acquisition of equipment through capital
lease..................................... 55,684 57,873
Reduction of debt in connection with exercise
of warrants............................... 175,000
Purchase of Aztec Industries, Inc.:
Accounts receivable.......................... 157,856 157,856
Inventories.................................. 349,613 349,613
Prepaids and other current assets............ 5,134 5,134
Property and equipment....................... 38,352 38,352
Goodwill..................................... 729,652 729,652
Accounts payable............................. (224,021) (224,021)
Accrued expenses............................. (74,873) (74,873)
Advances from the Company.................... (58,246) (58,246)
Line of credit............................... (41,000) (41,000)
Notes payable................................ (287,124) (287,124)
Leases payable............................... (28,343) (28,343)
Common stock................................. (567,000) (567,000)
Initial capitalization of Company:
Prepaids and other assets.................... $ 38,402
Patents...................................... 60,010
Property and equipment....................... 35,345
Accrued expenses............................. (13,000)
Notes payable to stockholders................ (60,757)
Common stock................................. (60,000)
</TABLE>
See notes to consolidated financial statements.
(Concluded)
F-8
<PAGE> 56
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM MAY 1, 1997 (DATE OF INCEPTION) TO
DECEMBER 31, 1997, YEAR ENDED DECEMBER 31, 1998 AND
SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
1. NATURE OF BUSINESS
The Company was incorporated as Total Switch, Inc. ("TSI") on May 1, 1997.
On December 31, 1997, TSI entered into a stock exchange agreement with SOS
International, Inc. ("SOS"), a Nevada corporation that was traded on the OTC
Bulletin Board. SOS had nominal assets and no liabilities on the date of the
acquisition. Under the stock exchange agreement, SOS changed its name to
DuraSwitch Industries, Inc. (the "Company") and acquired all of TSI's stock in
exchange for approximately 85 percent of SOS's outstanding common stock. As a
result of this transaction, TSI became a wholly-owned subsidiary of the Company,
and TSI's former stockholders took controlling interest in the Company. For
accounting purposes, the acquisition has been treated as a recapitalization of
TSI with TSI as the acquirer (reverse merger). As a consequence of this
combination, the Company became a publicly-traded company.
At December 31, 1997, the Company was in the development stage. During
1998, through the acquisition of Aztec Industries, Inc. ("Aztec"), the Company
commenced operations and is no longer in the development stage. The Company
designs, manufactures, markets and distributes integrated electronic control
panels developed with its patented technology.
On January 31, 1998, the Company acquired 100 percent of the outstanding
stock of Aztec by issuing 70,588 shares of common stock valued at $8.03 per
share, which price was based on the price of recent sales of common stock at
such time, and the forgiveness of advances made to Aztec prior to the
acquisition. The purchase of Aztec was recorded using the purchase accounting
method, which requires an adjustment of all assets and liabilities of Aztec to
their estimated fair values on the date of acquisition. The excess of the
consideration paid by the Company over the estimated fair value of the net
assets acquired ("goodwill") was $729,652 and is being amortized over ten years.
The results of operations of Aztec have been included in the Company's
consolidated financial statements beginning on February 1, 1998. During 1997,
the Company had advanced $59,797 to Aztec. At December 31, 1997, the Company
recognized an allowance equal to the balance of the advance.
The following unaudited pro forma combined condensed financial information
for 1997 include the results of operations for the Company, presented as if the
Company and Aztec had been combined for all of 1997, along with adjustments
which give effect to events that are directly attributable to the transaction
and are expected to have a continuing impact.
<TABLE>
<S> <C>
Net sales................................................... $1,572,782
Loss from operations........................................ $ (649,027)
Net loss.................................................... $ (697,668)
Basic net loss per common share............................. $ (0.18)
</TABLE>
Pro forma financial information is not presented for 1998 because the
Company purchased Aztec on January 31, 1998, and the 1998 operations previous to
the purchase would not have a material effect on the Company's operations.
The Company has experienced significant operating losses since its
inception. The Company anticipates that it will be able to continue to raise
additional capital from the sale of its equity securities. (Through February 26,
1999, the Company has raised approximately $650,000 of additional proceeds from
the sale of its common stock subsequent to December 31, 1998). In addition, the
Company has a $150,000 line of credit it may utilize, if necessary. As a result,
management believes the Company will be able to generate cash sufficient to meet
the Company's presently projected cash and working capital
F-9
<PAGE> 57
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requirements for the next 12 months. The timing and amounts of cash used will
depend on many factors, including the Company's ability to increase revenues,
control expenditures, and become profitable. Additional funds may be required if
the Company is not successful in any of these areas. The Company's ability to
continue funding its operations is dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis, or to obtain
additional funds through equity or debt financing, or from other sources of
financing, as may be required.
2. STOCK SPLIT
In connection with a proposed public offering of shares of the Company's
common stock, on August 16, 1999, the Company's Board of Directors declared a
4.25-to-1 reverse stock split which became effective on August 17, 1999. All
references in the financial statements to number of shares, per share amounts
and stock option data of the Company's common and preferred stock have been
restated to reflect the effect of the stock split.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION -- All material intercompany balances and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
INVENTORY is carried at the lower of cost, determined using the FIFO
("first-in, first-out") method, or market.
PROPERTY AND EQUIPMENT -- Depreciation is computed using the
straight-line method over the useful lives of the related assets as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 3 years
Other machinery and equipment............................... 5 years
Office furniture and fixtures............................... 5 years
</TABLE>
PATENTS are recorded at cost and amortized using the straight-line method
over five years. Patents are recorded net of accumulated amortization of $8,460
and $25,528 at December 31, 1997 and 1998, respectively.
GOODWILL is recorded at cost and is being amortized on a straight-line
basis over ten years. Goodwill is recorded net of accumulated amortization of
$66,885 at December 31, 1998.
INCOME TAXES -- Deferred taxes are provided on temporary differences
between the tax basis of assets and liabilities for financial reporting purposes
and income tax purposes.
LOSS PER COMMON SHARE -- Basic earnings or loss per share is computed by
dividing the loss attributable to the common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
or loss per share is computed using the weighted average number of shares of
common stock outstanding plus the effect of any stock options or warrants if
they are dilutive.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF -- The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair market value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
F-10
<PAGE> 58
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of cash and
cash equivalents, accounts receivable, accounts payable and loans payable
approximate fair values due to the short-term maturities of these instruments.
The fair value of notes payable and capital leases approximate the carrying
value of these instruments because the terms are similar to those in the market
place under which they could be replaced.
SEGMENTS -- The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, Disclosure about Segments of an Enterprise and
Related Information, for the year ended December 31, 1998. SFAS No. 131 modifies
the disclosure requirements for reportable segments. The Company operates in
only one segment. Consequently, the implementation of this Statement had no
effect on the Company's financial statement presentation.
COMPREHENSIVE INCOME -- The Company has adopted SFAS No. 130, Reporting
Comprehensive Income, for the year ended December 31, 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income, and its
components in a full set of general-purpose financial statements. The adoption
of this pronouncement had no effect on the Company's consolidated financial
statements.
NEW ACCOUNTING PRONOUNCEMENT -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires that an enterprise recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments as fair value. The statement is effective
for the Company's fiscal year ending December 31, 2001. The Company has not
completed evaluating the impact of implementing the provisions of SFAS No. 133.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
4. CONCENTRATIONS
The Company maintained its deposits in three financial institutions at
December 31, 1998 and in one financial institution at December 31, 1997. At
December 31, 1997 and 1998, the Company maintained deposits in excess of federal
depository insurance.
During 1998, over 50 percent of the Company's net sales were generated from
sales to 13 customers, including one customer which constituted over 11 percent
of the Company's net sales.
5. INVENTORY
Inventory consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Raw materials............................................... $101,765
Work in process............................................. 111,764
Finished goods.............................................. 42,038
Less reserve for obsolete inventory......................... (20,000)
--------
Total inventory............................................. $235,567
========
</TABLE>
F-11
<PAGE> 59
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Computer equipment.......................................... $ 51,331 $ 81,341
Office furniture and fixtures............................... 7,509 24,759
Other machinery and equipment............................... 11,905 116,378
-------- --------
Total....................................................... 70,745 222,478
Less accumulated depreciation............................... (10,408) (54,806)
-------- --------
Property, plant and equipment -- net........................ $ 60,337 $167,672
======== ========
</TABLE>
7. NOTES PAYABLE
Notes payable consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Note payable to bank, payments of principal and interest of
$4,536 with interest at 13.2% per annum, due March 31,
2002, collateralized by property and equipment............ $142,582
Note payable to former owner of Aztec, imputed interest at
8% per annum, due January 31, 2000, unsecured............. 72,787
--------
Total....................................................... 215,369
Less current portion........................................ 107,668
--------
Long term notes payable..................................... $107,701
========
</TABLE>
Future minimum maturities of notes payable as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $107,668
2000........................................................ 47,083
2001........................................................ 49,812
2002........................................................ 10,806
--------
Total....................................................... $215,369
========
</TABLE>
8. LOANS FROM OFFICERS
Loans from officers consist of two notes payable due to two stockholders
who are employees of the Company. The notes are due in 1999. The notes, which
bear interest at a rate of 9.5 percent and 18 percent, are not collateralized.
The note payable with the interest rate of 18% was repaid in January 1999.
In May 1998 and June 1998, the Company obtained additional funding of
$139,000 through the issuance of promissory notes to stockholders as well as to
a family member of one of the stockholders. These notes bear interest at a rate
of 18 percent. These notes were repaid in full on June 30, 1998.
9. LINE OF CREDIT
The Company maintains a $150,000 line of credit with a bank that bears
interest at the prime rate plus 2% (9.75% at December 31, 1998) and expires on
December 4, 1999. Outstanding borrowing on the line of credit are collateralized
by the Company's accounts, accounts receivable and inventory. The Company had no
borrowings on the line of credit at December 31, 1998. The Company borrowed
$95,000 against this line of credit in 1999.
F-12
<PAGE> 60
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CAPITAL LEASES
The Company has property and equipment with a gross value of $92,643 and a
book value of $70,555 under various capital leases. The amortization of fixed
assets acquired in capital leases is included in depreciation expense. At
December 31, 1998, the present value of future minimum capital lease payments
are as follows:
<TABLE>
<S> <C>
1999........................................................ $34,429
2000........................................................ 31,289
2001........................................................ 27,177
-------
Total....................................................... 92,895
Less interest at rates ranging from 11.69% to 16.26%........ 17,564
-------
Present value of minimum capital lease obligations.......... 75,331
Less current portion of capital lease obligations........... 25,317
-------
Long term portion of capital lease obligations.............. $50,014
=======
</TABLE>
11. STOCKHOLDERS' EQUITY
COMMON STOCK -- On May 1, 1997, 470,588 shares of common stock were
issued to the founders in exchange for patents, services, equipment and cash.
On December 31, 1997, the stockholders approved a change in the par value
of its common stock from no par to a par value of $.001 per share.
In January 1998, the Company issued 32,424 shares of common stock for cash
that was received in December 1997.
SERIES A CONVERTIBLE PREFERRED STOCK -- The Series A convertible
preferred stock is convertible into common stock at a rate of one for one and
has the same voting rights as the common stock. Dividends accumulate as declared
by the Board of Directors and none have been declared. Preferred stockholders
have preferences in the event of liquidation and would receive dividends prior
to common stockholders if dividends are declared.
During the period ended December 31, 1997, the Company completed a private
placement offering. The Company sold 350,866 of Series A convertible preferred
stock for cash and services totaling $448,444, net of costs. The proceeds of
this offering were used to pay debt, general and administrative expenses,
research and development and for working capital. All Series A convertible
preferred stock outstanding during the period was converted to common stock in
December 1997 upon the reverse merger at a rate of one for one.
During 1998, the Company raised $1,000,000 in a private placement from the
sale of 504,311 shares of Series A convertible preferred stock and warrants to
purchase 252,155 shares of common stock at a price of approximately $1.98 per
share. The warrants expire June 30, 2001. All shares of Series A convertible
preferred stock were converted to common stock on December 31, 1998. The Company
incurred offering costs of $116,915, which were treated as a reduction of
additional paid-in capital. The Series A convertible preferred stock sold in
1998 had a beneficial conversion feature because the preferred stock was
immediately convertible into common stock at a price less than the then current
fair market value, which value was based on the price of recent sales of common
stock at such time. The carrying amount of the preferred stock was discounted by
the intrinsic value of the beneficial conversion feature, which was determined
to be $740,000. The $740,000 discount was immediately amortized and charged to
accumulated deficit and is treated in a manner similar to a dividend to
preferred stockholders.
F-13
<PAGE> 61
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK -- In connection with the sale of common stock during 1998,
the Company issued warrants to purchase 89,929 shares of common stock as
consideration for services provided by consultants who assisted the Company in
raising capital. The estimated fair value of the warrants issued was $185,844,
as determined using the Black-Scholes valuation model assuming an expected
average risk-free interest rate of 5 percent, an expected life of four to five
years, an expected volatility of 45 percent and expected dividend rate of 0
percent. These warrants expire on June 30, 2003 (42,870 warrants with an
exercise price of $1.98 per share) and November 20, 2003 (47,059 warrants with
an exercise price of $3.19 per share).
WARRANTS -- As discussed above, the Company has 342,084 of outstanding
warrants to purchase common stock.
<TABLE>
<CAPTION>
WARRANTS PRICE RANGE
-------- -----------
<S> <C> <C>
Balance, December 31, 1997.................................. -- --
Warrants issued during 1998................................. 342,084 $1.98-$3.19
------- -----------
Balance, December 31, 1998.................................. 342,084 $1.98-$3.19
======= ===========
</TABLE>
REVERSE MERGER -- On December 31, 1997, a reverse merger was effectuated
with SOSI as discussed in Note 1. Concurrent with the reverse merger, the
following occurred: all outstanding preferred stock was converted into common
stock, a 6.4834-for-1 stock split occurred for all common shares outstanding,
and 620,792 shares of common stock were retained by the stockholders of SOSI.
12. INCENTIVE STOCK OPTION PLAN
Effective May 1, 1997, the Board of Director's approved a stock option plan
("1997 plan"). This plan provides for the granting of incentive and nonqualified
stock options to officers, directors and employees of the Company. The plan also
provides for the granting of nonqualified stock options to any director,
consultant or other individual whose participation the Board of Directors
determines to be in the best interest of the Company.
Upon completion of the reverse merger, the Board of Directors ratified the
change of the plan name to the Company's 1997 Stock Option Plan. Furthermore,
the Board of Directors ratified the number of shares reserved to be granted
under the plan to adjust for the 6.4834-for-1 stock split. Subsequent to
December 31, 1998, in a stockholders' meeting, the stockholders ratified the
Board of Directors' proposal to increase the number of shares authorized for
options under this plan to 823,535.
The Company accounts for the fair value of the options issued to
nonemployees in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The compensation cost that has been charged against income for
1997 and 1998 for the plan options is $1,495 and $1,403, respectively. Options
granted to nonemployees were for services performed such as engineering,
consulting and public relations.
The fair value of all stock option grants is estimated on the date of grant
in accordance with SFAS No. 123 using minimum value option pricing for options
granted prior to December 31, 1997, with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield..................................... 0%
Risk-free interest rate..................................... 5%
Expected life............................................... 10 years
</TABLE>
The assumptions used for options granted during 1998 are the same, except
the expected life of the options has been decreased from ten years to three
years and a volatility rate of 45 percent was used. During 1998, the Company
used the Black-Scholes valuation model to determine the options' fair value.
F-14
<PAGE> 62
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As permitted by SFAS No. 123, the Company has elected to continue to
measure cost for its stock-based compensation plans with employees using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no
compensation cost has been recognized as the option prices are equal to or
greater than fair market value on the grant dates. Had compensation for the
Company's stock options granted to employees been determined based upon the fair
value at the grant date for awards consistent with a methodology prescribed in
SFAS No. 123, the Company's net loss attributable to common stock and net loss
per share for the periods ended December 31, 1997 and 1998 would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Net loss:
As reported.............................................. $(449,086) $(2,339,428)
Pro forma................................................ (450,382) (2,635,764)
Basic net loss per share:
As reported.............................................. (0.12) (.55)
Pro forma................................................ (0.12) (.62)
Diluted net loss per share:
As reported.............................................. (0.12) (.55)
Pro forma................................................ (0.12) (.62)
</TABLE>
Options granted under the plan expire up to ten years after the date of
grant. The exercise price of such shares is equal to the market price or current
asking price of the Company's stock on the date of grant. Options that expire or
terminate prior to exercise are added to the shares available for future grants.
A summary of changes in stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Options granted on May 1, 1997.............................. 140,347 $ 0.02
Options granted during 1997................................. 42,256 0.13
Exercised................................................... (83,903) (0.02)
------- ------
Balance, December 31, 1997.................................. 98,700 0.06
Options granted during 1998................................. 640,932 13.18
Exercised................................................... (6,102) (0.02)
------- ------
Balance, December 31, 1998.................................. 733,530 $11.60
======= ======
</TABLE>
<TABLE>
<CAPTION>
1997 1998
----- --------
<S> <C> <C>
Exercisable at the end of the period........................ -- 445,296
===== ========
Weighted average fair value of options
granted during the period................................. $0.13 $ 13.18
===== ========
</TABLE>
F-15
<PAGE> 63
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.02 $ 1.32 92,834 8.5 $ 0.60 92,834 $ 0.60
$ 6.38 $ 6.93 351,128 9.9 $ 6.38 68,776 $ 6.46
$16.19 $22.31 289,568 8.8 $21.51 283,686 $21.59
- ------ ------ ------- --- ------ ------- ------
$ 0.02 $22.31 733,530 9.3 $11.60 445,296 $14.96
====== ====== ======= === ====== ======= ======
</TABLE>
13. INCOME TAXES
Net deferred tax assets consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards.............................. $ 135,600 $ 913,600
Contribution carryforwards................................ 1,600 6,800
Other..................................................... 16,000 18,900
--------- ---------
Total deferred tax assets................................... 153,200 939,300
Less valuation allowance.................................... (153,200) (939,000)
--------- ---------
Total....................................................... -- 300
Deferred tax liabilities -- Depreciation.................... -- (300)
--------- ---------
Total....................................................... $ -- $ --
========= =========
</TABLE>
During the periods ended December 31, 1997 and 1998, the Company recognized
a valuation allowance of $153,200 and $611,000, respectively, against deferred
tax assets. The valuation allowance reduces deferred tax assets to an amount
that represents management's best estimate of the amount of such deferred tax
assets that more likely than not will be realized. Realization of the deferred
tax assets is dependent upon sufficient future taxable income during the period
that temporary differences and carryforwards are expected to be available to
reduce taxable income.
The Company's net operating loss carryforwards of approximately $2,284,000
for federal income tax purposes begin to expire in 2011.
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income for the periods
ended December 31, 1997 and 1998 due to the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Benefit calculated at statutory rate........................ $ 157,000 $ 544,000
Increase (decrease) in income resulting from:
State income taxes, net................................... 36,000 96,000
Nondeductible expenses.................................... (39,800) (29,000)
Valuation allowance....................................... (153,200) (611,000)
--------- ---------
Total....................................................... $ -- $ --
========= =========
</TABLE>
F-16
<PAGE> 64
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS
MANAGEMENT SERVICES AGREEMENT -- The Company has a management services
agreement with a company owned and operated by the two major stockholders. This
management agreement requires the Company to pay a management service fee equal
to 1.1 percent of the invoiced sales price for all Company-patented technology
component switches and integrated switch panels sold by the Company. Also, the
Company has agreed to pay an equivalent percentage of any license or sublicense
fees received from the patented technology. This agreement remains in effect
until the expiration of the last patents which may issue on the switch
technology. During 1998, the Company expensed approximately $800 under this
agreement.
EMPLOYMENT AND SEPARATION AGREEMENTS -- The Company has several employment
and separation agreements with key members of management. These agreements call
for a base salary and bonuses based upon the performance of the Company. These
agreements also provide for salary and benefits in the event of termination.
LEASE AGREEMENTS -- Rent expense for the periods ended December 31, 1997
and 1998 approximated $11,000 and $81,500, respectively. Future minimum rental
payments, which includes a five-year lease for the Company's office and
manufacturing facilities, which expires January 1, 2004 and provides for one
two-year extension option, are as follows:
<TABLE>
<S> <C>
1999........................................................ $156,133
2000........................................................ 192,168
2001........................................................ 201,906
2002........................................................ 211,829
2003........................................................ 222,094
--------
Total....................................................... $984,130
========
</TABLE>
During 1998, the Company entered into an exclusive financial advisor
agreement with Duff & Phelps Securities ("D&P"). D&P is to assist the Company in
raising capital. The Company pays D&P a monthly fee, and the Company is required
to pay D&P additional fees if certain transactions occur. This agreement expires
May 2000 and can be terminated by either party with 30 days written notice.
15. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX-MONTH
PERIODS ENDED JUNE 30, 1998 AND 1999
ORGANIZATION AND BASIS OF PRESENTATION -- The accompanying interim
financial statements have been prepared by the Company in accordance with the
rules and regulations of the Securities and Exchange Commission for interim
reporting. Accounting policies utilized in the preparation of financial
information herein presented are the same as set forth in the Company's annual
financial statements. Certain disclosures and information normally included in
financial statements have been condensed or omitted. In the opinion of the
management of the Company, these financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim financial statements. Interim results of operations
are not necessarily indicative of the results of operations for the full year.
F-17
<PAGE> 65
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a. INVENTORY -- Inventory consists of the following at June 30, 1999:
<TABLE>
<S> <C>
Raw materials............................................... $174,536
Work in process............................................. 222,363
Finished goods.............................................. 17,039
Less reserve for obsolete inventory......................... (5,000)
--------
Total inventory............................................. $408,938
========
</TABLE>
b. NOTES PAYABLE -- During the six months ended June 30, 1999, the Company
borrowed $100,000 from a stockholder. The outstanding balance under this
note payable bears interest at 9 percent per annum. This note was
cancelled on April 30, 1999, in connection with warrants that were
exercised on April 30, 1999. On April 30, 1999, the Company borrowed
$200,000 from two stockholders. The outstanding borrowings are due July
1, 2000 and bear interest at a rate of 10 percent per annum. The
promissory notes were reduced by $75,000 in connection with the exercise
of warrants on June 30, 1999. The Company borrowed an additional
$200,000 under the same terms on July 1, 1999.
c. LINE OF CREDIT -- The line of credit agreement was amended on May 27,
1999 to increase the amount available to the Company to $250,000 and to
extend the expiration date to May 27, 2000. At June 30, 1999, the
Company had borrowings against the line of credit of $158,670.
d. CAPITAL LEASES PAYABLE -- During the first six months of 1999, the
Company acquired equipment with a cost of $57,873 under three capital
leases that bear interest at rates ranging from 18.36 percent to 24.02
percent.
At June 30, 1999, the total amount outstanding on capital leases was
$116,450.
e. STOCK OPTIONS -- During the six months ended June 30, 1999, there were
no options granted, exercised or cancelled under the 1997 DuraSwitch
Stock Option Plan. Options exercisable totaled 515,883 at June 30, 1999.
The Company's 1999 Stock Option Plan (the "1999 Option Plan") was
adopted by the Company's Board of Directors and ratified by the
stockholders on March 8, 1999. The maximum number of shares of common
stock subject to options that may be outstanding at any time under the
1999 Option Plan is 235,294 shares of common stock. A summary of stock
option activity related to the 1999 Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTION EXERCISE
SHARES AVERAGE
------ --------
<S> <C> <C>
Outstanding, January 1, 1999................................
Option granted during 1999.................................. 28,941 $8.07
Exercised...................................................
------ -----
Outstanding, June 30, 1999.................................. 28,941 $8.07
====== =====
Exercisable at June 30, 1999................................ 15,117
=====
</TABLE>
The Company accounts for the fair value of the options issued to
nonemployees in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The compensation cost that has been charged against income
for the six months ended June 30, 1998 and 1999 for stock options is $700
and $6,301, respectively. Options granted to nonemployees were for
services performed such as engineering, consulting and public relations.
F-18
<PAGE> 66
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As permitted by SFAS No. 123, the Company has elected to continue to
measure cost for its stock-based compensation plans with employees using
the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, no compensation cost has been recognized as the option prices
are equal to or greater than fair market value on the grant dates. Had
compensation for the Company's stock options granted to employees been
determined based upon the fair value at the grant date for awards
consistent with methodology prescribed in SFAS No. 123, the Company's net
loss attributable to common stock and net loss per share for the six months
ended June 30, 1998 and 1999 would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net loss:
As reported.......................................... $(1,384,880) $(1,204,285)
Pro forma............................................ (1,556,140) (1,255,953)
Basic and diluted net loss per share:
As reported.......................................... (.33) (.22)
Pro forma............................................ (.37) (.23)
</TABLE>
The fair value of each stock option grant is estimated on the date of the
grant using the Black-Scholes valuation model to determine the option's
fair value with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield................................... 0%
Risk-free interest rate................................... 5%
Expected life............................................. 3 years
Volatility rate........................................... 41%
</TABLE>
f. LOAN TO CAMPLEX -- During the first six months of 1999, the Company
advanced $150,000 to Camplex/Concept W Corporation ("Camplex"), an
entity that the Company had considered as a possible acquisition
candidate. On May 14, 1999, the Company determined that it would not
acquire Camplex. The $150,000 unsecured loan to Camplex is due January
1, 2000 and bears interest at 9 percent per annum.
g. STOCKHOLDERS' EQUITY -- During the first six months of 1999, the Company
sold 305,805 shares of common stock for net cash proceeds of $955,586.
On March 1, 1999 the Company sold to two stockholders warrants to
purchase 23,530 shares of common stock at a price of $3.19 per share.
These warrants were purchased by the stockholders for $5,000. The
warrants were exercised on June 30, 1999 for a $75,000 reduction in
principal of promissory notes executed with the Company on April 30,
1999.
On April 30, 1999, warrants to purchase 252,155 shares of common stock
at a price of approximately $1.98 per share were exercised. The Company
received cash of approximately $250,000, a promissory note receivable of
$147,263, and cancellation of a $100,000 note payable and $2,733 of
accrued interest for the exercise of the warrants.
* * * * * *
F-19
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
Board of Directors
Aztec Industries, Inc.
Phoenix, Arizona
We have audited the accompanying balance sheet of Aztec Industries, Inc.
(the "Company") as of January 31, 1998, and the related statements of
operations, stockholders' capital deficiency, 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, such financial statements present fairly, in all material
respects, the financial position of the Company at January 31, 1998, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix Arizona
February 26, 1999
F-20
<PAGE> 68
AZTEC INDUSTRIES, INC.
BALANCE SHEET
JANUARY 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable....................................... $ 157,856
Inventory................................................. 349,613
Prepaid expenses and other current assets................. 5,134
---------
Total current assets................................... 512,603
Property and equipment -- net............................... 38,352
---------
Total assets................................................ $ 550,955
=========
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 224,021
Line of credit............................................ 41,000
Accrued expenses and other current liabilities............ 74,873
Advances from DuraSwitch.................................. 117,197
Current portion of notes payable and capital leases
payable................................................ 97,152
---------
Total current liabilities.............................. 554,243
---------
Long-term liabilities:
Notes payable............................................. 199,502
Capital leases payable.................................... 18,813
---------
Total long-term liabilities............................ 218,315
---------
Total liabilities...................................... 772,558
---------
Commitments and contingencies (Notes 1 and 9)
Stockholders' capital deficiency:
Common stock, no par value, 10,000,000 shares authorized,
9,182 shares issued and outstanding.................... 121,909
Accumulated deficit....................................... (343,512)
---------
Total stockholders' capital deficiency................. (221,603)
---------
Total liabilities and stockholders' capital deficiency...... $ 550,955
=========
</TABLE>
See notes to financial statements.
F-21
<PAGE> 69
AZTEC INDUSTRIES, INC.
STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1998
<TABLE>
<S> <C>
Net sales................................................... $1,567,020
Cost of goods sold.......................................... 1,241,526
----------
Gross profit........................................... 325,494
Operating expenses -- Selling, general and administrative... 448,200
----------
Loss from operations........................................ (122,706)
Interest and other expense.................................. (52,911)
----------
Net loss.................................................... $ (175,617)
==========
</TABLE>
See notes to financial statements.
F-22
<PAGE> 70
AZTEC INDUSTRIES, INC.
STATEMENT OF STOCKHOLDERS' CAPITAL DEFICIENCY
YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK,
NO PAR VALUE
------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1997....................... 9,182 $121,909 $(167,895) $ (45,986)
Net loss........................................ (175,617) (175,617)
----- -------- --------- ---------
BALANCE, JANUARY 31, 1998....................... 9,182 $121,909 $(343,512) $(221,603)
===== ======== ========= =========
</TABLE>
See notes to financial statements.
F-23
<PAGE> 71
AZTEC INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED JANUARY 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(175,617)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 15,656
Gain on sale of fixed assets........................... (3,000)
Changes in assets and liabilities:
Accounts receivable.................................... 46,244
Inventory.............................................. (85,078)
Prepaid expenses and other current assets.............. (5,134)
Accounts payable....................................... (26,582)
Accrued expenses and other current liabilities......... 21,627
---------
Net cash used in operating activities................ (211,884)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from sale of equipment...................... 3,000
Purchases of property and equipment....................... (15,387)
---------
Net cash used in investing activities................ (12,387)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 204,958
Principal paid on notes payable and capital leases........ (83,926)
Net repayments of line of credit.......................... (9,000)
Advances from DuraSwitch.................................. 117,197
---------
Net cash provided by financing activities............ 229,229
---------
Increase in cash and cash equivalents....................... 4,958
Cash and cash equivalents, beginning of year................ (4,958)
---------
Cash and cash equivalents, end of year...................... $ --
=========
Supplemental disclosure of cash flow
information -- Cash paid for interest....................... $ 38,844
=========
</TABLE>
See notes to financial statements.
F-24
<PAGE> 72
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
1. DESCRIPTION OF BUSINESS
Aztec Industries, Inc. (the "Company") was incorporated in Arizona on May
11, 1972. The Company designs, manufactures, markets and distributes membrane
switch products and overlays.
On January 31, 1998, DuraSwitch Industries, Inc. acquired 100 percent of
the Company's outstanding stock. The financial statements do not include any
adjustments to give effect to the acquisition.
2. SUMMARY OF ACCOUNTING PRINCIPLES
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORY is carried at the lower of cost, determined using the FIFO
(first-in, first-out) method, or market.
PROPERTY AND EQUIPMENT -- Depreciation is computed using the straight-line
method over the useful lives of the related assets as follows:
<TABLE>
<S> <C>
Equipment................................................... 3-5 years
Office furniture and fixtures............................... 5 years
</TABLE>
Assets under capital leases are amortized over the shorter of the related
estimated useful lives or the term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF -- The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair market value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
INCOME TAXES -- Deferred taxes are provided on temporary differences
between the tax basis of assets and liabilities for financial reporting purposes
and income tax purposes.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. INVENTORY
Inventory consists of the following at January 31, 1998:
<TABLE>
<S> <C>
Raw materials............................................... $159,008
Work in process............................................. 174,906
Finished goods.............................................. 63,699
Less reserve for obsolete inventory......................... (48,000)
--------
Total inventory............................................. $349,613
========
</TABLE>
F-25
<PAGE> 73
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at January 31, 1998:
<TABLE>
<S> <C>
Equipment................................................... $517,649
Office furniture and fixtures............................... 2,080
--------
Total....................................................... 519,729
Less accumulated depreciation............................... (481,377)
--------
Property, plant and equipment -- net........................ $ 38,352
========
</TABLE>
5. NOTES PAYABLE
Notes payable at January 31, 1998 consist of the following:
<TABLE>
<S> <C>
Note payable to bank, which requires monthly payments of
principal and interest of $4,536 with interest at 13.2%,
due March 31, 2002, collateralized by property and
equipment................................................. $173,585
Note payable to Company president, interest at 7.5%, due
January 31, 2000, unsecured............................... 113,539
--------
Total....................................................... 287,124
Less current portion........................................ 87,622
--------
Long-term debt.............................................. $199,502
========
</TABLE>
Future minimum maturities of notes payable as of January 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $ 87,622
2000........................................................ 98,636
2001........................................................ 44,138
2002........................................................ 50,370
2003........................................................ 6,358
--------
Total....................................................... $287,124
========
</TABLE>
6. LINE OF CREDIT
The Company maintains a $50,000 line of credit with a bank that bears
interest at 10.5 percent and expires on March 31, 1998. At January 31, 1998, the
Company had outstanding borrowings of $41,000. Outstanding borrowings were
collateralized by accounts receivable and inventory.
7. CAPITAL LEASES PAYABLE
The Company has acquired property and equipment with a gross value of
$36,959 and a book value of $25,900 under various capital leases. The
amortization of fixed assets acquired in capital leases is included
F-26
<PAGE> 74
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in depreciation expense. At January 31, 1998, the present value of future
minimum capital lease payments with terms in excess of one year are as follows:
<TABLE>
<S> <C>
1999........................................................ $11,998
2000........................................................ 12,821
2001........................................................ 9,680
-------
Total....................................................... 34,499
Less interest at rates ranging from 11.69% to 16.25%........ 6,156
-------
Present value of minimum capital lease obligations.......... 28,343
Less current portion of capital lease obligations........... 9,530
-------
Long-term portion of capital lease obligations.............. $18,813
=======
</TABLE>
8. INCOME TAXES
Net deferred tax assets consist of the following components as of January
31, 1998:
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards.............................. $176,200
Contribution carryforwards................................ 400
--------
Total deferred tax assets................................... 176,600
Less valuation allowance.................................... (175,300)
--------
Total....................................................... 1,300
Deferred tax liabilities -- Depreciation and amortization... (1,300)
--------
Total....................................................... $ --
========
</TABLE>
At January 31, 1998, the Company had a valuation allowance of $175,300
against the net deferred tax assets to reduce the total to zero. The valuation
allowance reduces deferred tax assets to an amount that represents management's
best estimate of the amount of such deferred tax assets that more likely than
not will be realized. Realization of the deferred tax assets is dependent upon
sufficient future taxable income during the period that temporary differences
and carryforwards are expected to be available to reduce taxable income.
The Company's net operating loss carryforwards of approximately $441,000
for federal and state income tax purposes begin to expire in 2016.
The income tax benefit differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the year ended
January 31, 1998 due to the following:
<TABLE>
<S> <C>
Benefit calculated at statutory rate........................ $59,700
Increase (decrease) in income resulting from:
State income tax benefit, net............................... 10,500
Nondeductible expenses.................................... (600)
Valuation allowance....................................... (69,600)
-------
Total....................................................... $ --
=======
</TABLE>
F-27
<PAGE> 75
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
Rent expense for the year ended January 31, 1998 was $79,262. The Company
had operating leases for its manufacturing facilities that require total monthly
payments of $6,832 and that expire on December 31, 1998. The future minimum
rental payments remaining at January 31, 1998 total $75,152.
* * * * * *
F-28
<PAGE> 76
Inside Back Cover: At the top of the page is a "DuraSwitch.com" logo. On the top
right portion of the page is the following text: "Our Web site is a key
component of our current marketing efforts. All of our advertising and
promotional materials direct readers to the site. In addition to attracting
potential customers to our web site for information, we use our web site to
generate interest in our products. We have already made significant sales as a
result of initial contact with customers through our web site." Graphic at upper
left depicts the home page of the DuraSwitch web site. 3 graphics in the middle
of the page depict the product listing page, DuraSwitch PushGate page and
DuraSwitch Pushgate actuation demo page of the web site. Text, in bullet point
form, at bottom of page: "Our web site has several features including:
Information about the comparative advantages of our patented technology;
Articles published by third parties about our products; Technical data to assist
design engineers; e-mail communications links to our design engineers and sales
representatives to facilitate dialogue; and on-line product ordering
capability."
<PAGE> 77
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[DURASWITCH INDUSTRIES, INC. LOGO]
3,000,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
[Cruttenden Roth Logo]
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 78.751 et seq. of the Nevada General Corporation Law (the "General
Corporation Law") allow a company to indemnify its officers, directors,
employees, and agents from any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative, or investigative, except
under circumstances described in the following paragraph. Indemnification may
only occur if a determination has been made that the officer, director,
employee, or agent acted in good faith and in a manner which such person
believed to be in the best interests of the company. A determination may be made
by the stockholders; by a majority of the directors who were not parties to the
action, suit, or proceeding confirmed by opinion of independent legal counsel;
or by opinion of independent legal counsel in the event of a quorum of directors
who were not a party to such action, suite or event a quorum of director who
were not a party to such action, suit or proceeding does not exist. Provided the
terms and conditions of these provisions of the General Corporation Law are met,
officers, directors, employees, and agents of DuraSwitch may be indemnified
against any cost, loss, or expense arising out of any liability under the
Securities Act of 1933.
The General Corporation Law provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he 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 or enterprise, against expenses, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
The General Corporation Law provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation. However, no indemnification may be made in respect to any claim,
issue or matter as to which the person is adjudged to be liable to the
corporation unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines that in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to be indemnified for such expenses which the court deems proper.
The General Corporation Law further provides that to the extent a director
or officer of a corporation has been successful in the defense of any action,
suit or proceeding referred to in subsections (a) and (b) or in the defense or
any claim, issue or matter in the action, suit or proceeding, he will be
indemnified against expenses actually and reasonably incurred by him in
connection with the action, suit or proceeding; that indemnification provided
for by the General Corporation Law will not be deemed exclusive of any other
rights to which the indemnified party may be entitled; and that the corporation
may purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him or any liability and
expenses 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 liabilities and expenses under the General Corporation Law.
Section 78.037 of the General Corporation Law provides that a corporation
in its original articles of incorporation or an amendment to its articles of
incorporation validly approved by stockholders may
II-1
<PAGE> 79
eliminate or limit personal liability of a director or officer to the
corporation or its stockholders for damages for breach of fiduciary duty.
However, no such provision may eliminate or limit the liability of a director or
officer for acts or omissions which involve intentional misconduct, fraud or
knowing violation of law, or the payment of unlawful distributions. A provision
of this type has no effect on the availability of equitable remedies, such as
injunction or rescission, for breach of fiduciary duty. DuraSwitch's Articles of
Incorporation contain such a provision.
DuraSwitch's bylaws provide that we will indemnify officers and directors
to the full extent permitted by and in the manner permissible under the laws of
the State of Nevada.
DuraSwitch has comprehensive directors and officers liability insurance
coverage, with an aggregate policy limit of $2,000,000 for the benefit of its
officers and directors insuring such persons against certain liabilities,
including liabilities under the securities laws.
DuraSwitch and its officers, directors and other persons are entitled to be
indemnified under certain circumstances for certain securities law violations as
described in the Underwriting Agreement (attached to this registration statement
as Exhibit 1.1).
The holders of DuraSwitch's capital stock or warrants to purchase capital
stock who have contractual registration rights are required to be indemnified by
us against losses, claims, damages or liabilities arising out of any untrue
statement of a material fact or omission of a material fact in a registration
statement under the Securities Act of 1933. Our obligation to indemnify those
holders includes the officers, directors and partners of those holders, one of
whom is currently a director of DuraSwitch. We will not be liable for any such
indemnity to the extent that any loss, claim, damage or liability arises out of
or is based upon any untrue statement or material omission in reliance upon and
in conformity with written information furnished by the indemnified person to
DuraSwitch, specifically for use therein.
The indemnification provided as set forth above is not exclusive of any
other rights to which a director or officer of DuraSwitch may be entitled. The
general effect of the forgoing provisions may be to reduce the circumstances in
which a director or officer may be required to bear the economic burdens of the
forgoing liabilities and expenses.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
DuraSwitch under the foregoing provisions, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses (other than
underwriting discounts) to be born by the Registrant in connection with the
issuance and distribution of the securities offered hereby:
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
SEC filing fee.............................................. $ 8,632
Underwriter's non-accountable expense allowance............. 510,000
NASDAQ NMS application fee.................................. 72,875
Printing and engraving...................................... 160,000
Legal fees and expenses..................................... 200,000
Accounting fees and expenses................................ 150,000
Transfer agent and registrar fees and expenses.............. 15,000
Director's and officers' liability insurance................ 70,000
Miscellaneous............................................... 43,493
----------
Total.................................................. $1,200,000
==========
</TABLE>
II-2
<PAGE> 80
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following paragraphs set forth certain information with respect to
securities sold by DuraSwitch within the past three years in transactions that
were not registered under the Securities Act.
In May 1997, Mr. R. Terren Dunlap, our Chief Executive Officer, and Mr.
Anthony J. Van Zeeland, our Chief Operating Officer, formed an Arizona
corporation known as Total Switch, Inc. In connection with the formation of
Total Switch, Mr. Dunlap and Mr. Van Zeeland each received shares of common
stock representing a 49.5% equity interest in Total Switch and Mr. Michael Van
Zeeland, Mr. Anthony J. Van Zeeland's son, and Mr. Rhett Dunlap, Mr. R. Terren
Dunlap's son, each received shares of common stock representing a 0.5% equity
interest in Total Switch. These individuals, all accredited investors,
contributed a nominal amount of capital for Total Switch's initial
capitalization, which relied upon the exemption from registration set forth in
Section 4(2) of the Securities Act. In addition, Mr. A. Van Zeeland assigned his
continuing rights in the patents for his switch technology, and Total Switch
issued a note payable to creditors of Mr. A. Van Zeeland in the amount of
$20,569 to satisfy loans made to Mr. A. Van Zeeland to cover the costs of filing
the patents for his switch technology.
On May 1, 1997, in reliance upon the exemption from registration set forth
in Section 4(2) of the Securities Act, Total Switch granted to Mr. Robert
Brilon, a sophisticated investor, 22,883 options to purchase common stock at an
exercise price of $0.02 per share and 1,525 shares of common stock in return for
financial and accounting consulting services. Mr. Brilon had access to all of
Total Switch's records, documents and financial statements prior to receipt of
his shares.
On May 1, 1997, in reliance upon the exemption from registration set forth
in Section 4(2) of the Securities Act, Total Switch issued 30,510 shares of
common stock to Richard L. Barrett, an accredited investor, in return for legal
services.
During fiscal 1997, in reliance upon the exemption from registration set
forth in Rule 505 promulgated under the Securities Act, Total Switch issued
shares of Series A Convertible Preferred stock convertible into 350,866 shares
of Total Switch common stock to, the following 26 investors in a private
placement at a price of $1.31 per share. A few investors received some or all of
their shares in exchange for services. Each investor's status as an accredited
or sophisticated investor is set forth opposite such investor's name below,
along with a notation indicating which investors received some or all of their
shares in exchange for services. In addition, the shares issued to J. Michael
Miller and Michelle Heyman, JTWROS were in exchange for the release of a
$20,568.70 promissory note. In connection with this private placement, Total
Switch provided all of these investors, whether accredited or sophisticated,
with a private placement memorandum which included financial and business
information about Total Switch.
II-3
<PAGE> 81
<TABLE>
<CAPTION>
NAME OF PURCHASER TYPE OF PURCHASER
----------------- -----------------
<S> <C>
Richard Barrett Accredited
Peter L. Bentz and Danna M. Bentz, JTWROS Accredited
Michael J. Blank and Carmela Blank CP Accredited
Joel H. Bock and Mary L. Bock, JTWROS (50% Services) Sophisticated
Robert Bruns Accredited
M. Craig Cocciola (Services) Accredited
John Corritore Accredited
Susan R. Eckert Accredited
Teresa L. Ellison Sophisticated
Ronald M. Fried and Lisa M. Fried, JTWROS Accredited
Maureen Goodwin Accredited
Gordon C. James Public Relations, Inc. Accredited
Gerard J. Jordan and Deborah A. Jordan, JTWROS Sophisticated
William F. Judd Sophisticated
Stephen B. Keyser Accredited
J. Michael Miller and Michelle Heyman, JTWROS Sophisticated
Russell L. Olson and Carole Olson, JTWROS Sophisticated
William E. Peelle Accredited
Mark H. Ryan Accredited
Richard F. Schobert Sophisticated
Patrick C. Scofield and Jeannie P. Scofield, JTWROS
(Services) Sophisticated
Glennis D. Snow Sophisticated
Soll Unitrust Accredited
Joseph A. Sprince and Gerald B. Allen, JTWROS (50% Services) Sophisticated
Mitchell J. Stillman Accredited
Warnke Limited Liability Company Sophisticated
</TABLE>
On December 31, 1997, Total Switch was acquired by an inactive
publicly-held Nevada corporation, formerly known as SOS International, Inc. In
connection with this transaction, SOS changed its name to DuraSwitch Industries,
Inc., and the stockholders of Total Switch set forth above became the holders of
85% of DuraSwitch, in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act, with the original stockholders of SOS
holding the remaining 15%.
On January 31, 1998, in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act, DuraSwitch issued 70,588 shares of
common stock to Anthony G. Shumway Revocable Trust and Ivan R. Jones, the
stockholders of Aztec Industries, Inc. in return for all of the issued and
outstanding capital stock of Aztec Industries, Inc. under a Share Exchange
Agreement dated January 16, 1998 by and among DuraSwitch Industries, Inc., Aztec
Industries, Inc., and the stockholders of Aztec. The Aztec stockholders were
sophisticated investors and had access to all of DuraSwitch's records, documents
and financial statements prior to the closing of the transaction.
In the first quarter ending March 31, 1998, in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act, DuraSwitch
issued 44,894 shares of common stock to the following six investors, all
accredited investors, in a private placement at a price of $8.02 per share:
Bryan Schutjer and Annette Schutjer, community property; Ramas L.P.; TVC, Inc.;
Michael J. Blank and Carmela Blank, community property; Soll Unitrust; and Wayne
Schreck.
In June 1998, in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act, DuraSwitch issued 16,706 shares of common
stock to the following four investors, all accredited investors, in a private
placement at a price of $4.25 per share: Dee Ring, Inc.; Kent R. Weaver and
Tamara L. Weaver, community property; and Joseph L. Zeiden and Julie Graham
Zeiden.
II-4
<PAGE> 82
On June 30, 1998, in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act, DuraSwitch issued to Duff & Phelps
Securities LLC, an accredited investor, warrants to purchase 42,870 shares of
common stock at $1.98 per share, in exchange for financial consulting services.
In June 1998, in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act, DuraSwitch issued 8,235 shares of common
stock to Peter Bentz, an accredited investor, in a private placement in return
for business planning services.
On June 29, 1998, in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act, DuraSwitch issued shares of Series
A Convertible Preferred Stock convertible into 504,311 shares of DuraSwitch
common stock, together with warrants to purchase 252,155 additional shares of
common stock, to Blackwater Capital Partners, L.P. and another entity controlled
by Blackwater, both accredited investors. Blackwater purchased these securities
for a total payment of approximately $1,000,000.
On November 20, 1998, under a consulting agreement and in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act,
DuraSwitch issued to Robert J. Brilon, a sophisticated investor, warrants to
purchase 47,059 shares of common stock at $3.19 per share.
On December 31, 1998, DuraSwitch issued 504,311 shares of common stock to
Blackwater Capital Partners, L.P. in conversion of its shares of Series A
Convertible Preferred Stock.
During fiscal year 1998, in reliance upon the exemption from registration
set forth in Section 4(2) of the Securities Act, DuraSwitch issued 121,804
shares of common stock to the following 11 investors, all accredited investors,
in a private placement for $3.19 per share. A few investors received some or all
of their shares in exchange for services. A notation indicating which investors
received some or all of their shares in exchange for services is set forth
opposite such investor's name below.
NAME OF PURCHASER
MCA Resources, Inc. (Services)
Joseph A. Sprince and Gerald B. Allen, JTWROS (60% Services)
William E. Peelle and Carol S. Peelle, JTWROS
Susan R. Eckert
Mark H. Ryan
Van De Investments
Stephen L. & Earl W. Sauder, tenants in common
Presbyterian Healthcare System Section 83 Trust SBO Douglas D. Hawthorne
Blackwater Capital Partners, L.P.
John Corritore
In September and December 1998, DuraSwitch issued 6,102 shares of common
stock to two holders of options, Philip B. Strauss and Karen Snow, upon exercise
of those options. These two stockholders were sophisticated investors and had
access to all of Total Switch's and DuraSwitch's records, documents and
financial statements prior to purchasing the stock.
From January to April 1999, in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act, DuraSwitch issued
308,940 shares of common stock to the following 22 investors, all accredited
investors, in a private placement for $3.19 per share.
The MRT Limited Partnership
Dain Rauscher, Cust., Mark S. Austenfeld IRA
Mark S. Austenfeld
Keith A. and Helen C. Thomas, JTWROS
John M. Guion Trust, John M. Guion or Jane Lee Guion, Co-Trustees
Charles Duane Woodmas
James A. Wilkens
II-5
<PAGE> 83
Michela Alioto
Michael R. Spence
Shawn Stole and Kimberly S. Stole, Community Property
Wayne A. Schreck and Karen S. Schreck, JTWROS
Thomas G. Maiyer
K. Gary Gietz and Camille Gietz, JTWROS
Leo M. Kearns
Paine Webber Custodian for Duane S. Black IRA
DeVar S. Thatcher and Charlotte C. Thatcher, JTWROS
Gerald M. Bliss
William E. Crisp
Jean E. Shelby and Jack M. Shelby, JTWROS
John W. Hail and Helen Hail, JTWROS
C. Randy Sheldon
Robert Pazderka
On March 1, 1999, in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act, DuraSwitch issued to Bryan and
Annette Schutjer, community property, and Ramras L.P., both accredited
investors, warrants to purchase an aggregate of 23,530 shares of common stock at
$3.19 per share. These investors purchased the warrants for a total of $5,000.
These investors exercised the warrants on June 30, 1999 in exchange for a
$75,000 reduction in principal of promissory notes executed with DuraSwitch on
April 30, 1999.
On April 30, 1999, DuraSwitch issued 252,155 shares of common stock to
Blackwater and its assignee, both accredited investors, upon exercise of their
warrants.
ITEM 27. EXHIBITS.
See "Exhibit Index" following the Signature page which is incorporated
herein by reference.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424 (b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of the registration statement as of the time the Commission declared it
effective.
II-6
<PAGE> 84
(2) For determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered in the registration statement, and that offering of the securities
at that time as the initial bona fide offering of those securities.
II-7
<PAGE> 85
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
DuraSwitch hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2, and has authorized this
amended registration statement to be signed on its behalf by the undersigned in
the City of Phoenix, State of Arizona, on August 17, 1999.
DuraSwitch Industries, Inc.
By: /s/ R. TERREN DUNLAP
------------------------------------
R. Terren Dunlap
Chief Executive Officer, Chairman of
the Board
and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
PERSON TITLE DATE
------ ----- ----
<C> <S> <C>
/s/ R. TERREN DUNLAP Chief Executive Officer, and August 17, 1999
- --------------------------------------------------- Director (Principal Executive
R. Terren Dunlap Officer)
/s/ ROBERT J. BRILON President, Chief Financial August 17, 1999
- --------------------------------------------------- Officer, Secretary and
Robert J. Brilon Treasurer (Principal Financial
and Accounting Officer)
/s/ ANTHONY J. VAN ZEELAND Chief Operating Officer, August 17, 1999
- --------------------------------------------------- Executive Vice President of
Anthony J. Van Zeeland Engineering and Director
/s/ J. THOMAS WEBB Executive Vice-President of August 17, 1999
- --------------------------------------------------- Marketing and Director
J. Thomas Webb
/s/ JOHN W. HAIL Director August 17, 1999
- ---------------------------------------------------
John W. Hail
/s/ STEVEN R. GREEN Director August 17, 1999
- ---------------------------------------------------
Steven R. Green
/s/ WILLIAM E. PEELLE Director August 17, 1999
- ---------------------------------------------------
William E. Peelle
/s/ MICHAEL A. VAN ZEELAND Director August 17, 1999
- ---------------------------------------------------
Michael A. Van Zeeland
</TABLE>
S-1
<PAGE> 86
DURASWITCH INDUSTRIES, INC.
EXHIBIT INDEX TO AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM SB-2
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
1.1 Proposed Form of Underwriting Agreement
2.1* Stock Exchange Agreement and addendum effective as of
December 31, 1997 by and among SOS International, Inc.,
Total Switch, Inc., and R. Terren Dunlap and Anthony J. Van
Zeeland
2.2* Share Exchange Agreement dated January 16, 1998 by and among
DuraSwitch Industries, Inc., Anthony Gene Shumway, Dian D.
Shumway, Dana S. Jones, and Ivan R. Jones and The Anthony
Gene Shumway Family Revocable Living Trust and Aztec
Industries, Inc.
3.1* Amended and Restated Articles of Incorporation of DuraSwitch
Industries, Inc., as filed September 18, 1998
3.2* Amended and Restated Bylaws of DuraSwitch Industries, Inc.,
as adopted June 2, 1999
4.1* Articles 3, 4, 5 and 7 of the Amended and Restated Articles
of Incorporation of DuraSwitch Industries, Inc. (included in
Exhibit 3.1)
4.2* Articles II, VI and VII of the Amended and Restated Bylaws
of DuraSwitch Industries, Inc., (included in Exhibit 3.2)
4.3* Specimen Common Stock Certificate
5.1* Opinion of Quarles & Brady LLP
10.1* Employment and Separation Agreement dated May 1, 1997 by and
between Registrant and R. Terren Dunlap
10.1.1* July 30, 1999 Amendment to R. Terren Dunlap Employment and
Separation Agreement
10.2* Employment and Separation Agreement dated May 1, 1997 by and
between Registrant and Anthony J. Van Zeeland
10.2.1* July 30, 1999 Amendment to Anthony J. Van Zeeland Employment
and Separation Agreement
10.3* Employment and Separation Agreement dated November 20, 1998
by and between DuraSwitch Industries, Inc. and J. Thomas
Webb
10.4* Employment and Separation Agreement dated November 20, 1998
by and between DuraSwitch Industries, Inc. and Robert J.
Brilon
10.5* Registrant's 1997 Stock Option Plan
10.6* Form of Grant Letter pursuant to 1997 Stock Option Plan
10.7* Registrant's 1999 Stock Option Plan
10.8 Form of Representative's Warrants
10.9* Series A Convertible Stock and Warrant Purchase Agreement
dated June 30, 1998 by and among DuraSwitch Industries, Inc.
and Blackwater Capital Partners, L.P. and Blackwater Capital
Group, L.L.C.
10.10* Registration Rights Agreement dated June 30, 1998, by and
between DuraSwitch Industries, Inc. and Blackwater Capital
Group, L.L.C.
10.11* Registration Rights Agreement dated June 30, 1998, by and
between DuraSwitch Industries, Inc. and Blackwater Capital
Partners, L.P.
10.12* Letter agreement dated May 14, 1998, as amended July 14,
1998, by and between DuraSwitch Industries, Inc. and Duff &
Phelps Securities, LLC
10.13* Promissory Note of DuraSwitch Industries, Inc. dated January
30, 1998, as amended December 31, 1998, in the aggregate
amount of $164,000 payable to Anthony G. Shumway
</TABLE>
EX-1
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
10.14* Warrant to Purchase 182,199 shares of Common Stock of
DuraSwitch Industries, Inc. issued June 30, 1998 and held by
Duff & Phelps Securities, LLC
10.15* Standard Sublease dated October 15, 1998, as amended
February 22, 1999, by and between 234 South Extension,
L.L.C. and DuraSwitch Industries, Inc.
10.16* Management Services Agreement dated May 1, 1997 by and
between Total Switch, Inc. and VanDun, LLC.
10.17* Agreement for Assignment of Present and Future Inventions in
Certain Subject Matter dated May 1, 1997 by and between
Total Switch, Inc. and Anthony J. Van Zeeland
10.18* Ericsson, Inc. purchase order dated April 7, 1999 (portions
of the exhibit have been omitted pursuant to a request for
confidential treatment)
16.1* Letter on change in certifying accountant
21.1* Subsidiaries of the Registrant
23.1 Consent of McGladrey & Pullen, L.L.P.
23.2 Consent of Deloitte & Touche LLP
23.3* Consent of Quarles & Brady LLP (included in Exhibit 5.1)
24.1* Form of Power of Attorney of Selling Stockholder
27.1* Financial Data Schedule
99.1* Form of Lock-up Agreement
</TABLE>
- ---------------
* Filed previously with original registration statement on June 4, 1999 and
incorporated by reference in this Amendment No. 3.
EX-2
<PAGE> 1
Exhibit 1.1
DRAFT 08/06/99
3,450,000 SHARES
DURASWITCH INDUSTRIES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
August ___, 1999
CRUTTENDEN ROTH INCORPORATED
As Representative of the several Underwriters
24 Corporate Plaza
Newport Beach, California 92660
Ladies and Gentlemen:
DuraSwitch Industries, Inc., a Nevada corporation (the "Company"),
addresses you as the Representative of each of the persons, firms and
corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 3,000,000
shares of its authorized and unissued Common Stock, $.001 par value per share
(the "Firm Shares"), to the several Underwriters. The Company and Blackwater
Capital Partners, L.P. (the "Selling Securityholder") also propose to grant to
the Underwriters an option to purchase up to 450,000 additional shares of the
Company's Common Stock, $.001 par value per share (the "Option Shares"), as
provided in Section 8 hereof. In addition, the Company proposes to sell to you,
individually and not in your capacity as Representative, five-year warrants (the
"Representative's Warrants") to purchase up to 300,000 shares of Common Stock,
$.001 par value per share, of the Company (the "Representative's Warrant
Stock"), which sale will be consummated in accordance with the terms and
conditions of the Representative's Warrant Agreement (the "Representative's
Warrant Agreement"), the form of which is filed as an exhibit to the
Registration Statement described below. As used in this Agreement, the term
"Shares" shall include the Firm Shares and the Option Shares. All shares of
Common Stock, $.001 par value per share, of the Company to be outstanding after
giving effect to the sales contemplated hereby, including the Firm Shares and
the Option Shares, are hereinafter referred to as "Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company
represents and warrants to, and agrees with, each Underwriter that:
(a) A registration statement on Form SB-2 (File No. 333- 79969) with
respect to the Shares, including a prospectus, has been prepared by the Company
in conformity with the
<PAGE> 2
requirements of the Securities Act of 1933, as amended (the "Act"), and the
applicable rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Act and has been filed with
the Commission; such amendments to such registration statement, such
prospectuses and abbreviated registration statements pursuant to Rule 462(b) of
the Rules and Regulations (a "462 Registration Statement") as may have been
required prior to the date hereof have been similarly prepared and filed with
the Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses and such 462 Registration
Statements as may hereafter be required. Copies of such registration statement
and amendments, together with each exhibit filed therewith, of each related
prospectus contained or filed as part of any pre-effective amendment to such
registration statement or filed pursuant to Rule 424(a) (the "Preliminary
Prospectuses"), and of any 462 Registration Statement, have been delivered to
you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if the Representative, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations
pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if the
Representative, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits (including exhibits incorporated by
reference), in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of
the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment
thereto or the filing of any 462 Registration Statement after the effective date
of such registration statement, shall also mean (from and after the
effectiveness of such amendment or the filing of any 462 Registration Statement)
such registration statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Shares as included in such Registration
Statement at the time it becomes effective (including, if the Company omitted
information from the Registration Statement pursuant to Rule 430A(a) of the
Rules and Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of the Rules
and Regulations); provided, however, that if in reliance on Rule 434 of the
Rules and Regulations and with the consent of the Representative, on behalf of
the several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that
a confirmation is sent or
2
<PAGE> 3
given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall
mean the "prospectus subject to completion" (as defined in Rule 434(g) of the
Rules and Regulations) last provided to the Underwriters by the Company and
circulated by the Underwriters to all prospective purchasers of the Shares
(including the information deemed to be a part of the Registration Statement at
the time it became effective pursuant to Rule 434(d) of the Rules and
Regulations). Notwithstanding the foregoing, if any revised prospectus shall be
provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
the Representative, on behalf of the several Underwriters, the Company shall
have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c),
as applicable, prior to the time that a confirmation is sent or given for
purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet,
together, will not be materially different from the prospectus in the
Registration Statement.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof. The information set
forth on the inside front cover page of the Prospectus (insofar as such
information relates to the Underwriters) concerning stabilization,
over-allotment and passive market making by the Underwriters, and under the
first, second and eleventh paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement.
3
<PAGE> 4
(c) If the Company has elected to rely on Rule 462(b) and the 462
Registration Statement has not been declared effective, (i) the Company has
filed a 462 Registration Statement in compliance with, and that is effective
upon filing pursuant to, Rule 462(b) and has received confirmation of its
receipt and (ii) (a) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
462 Registration Statement, in compliance with Rule 111 promulgated under the
Act, or (b) the Commission has received payment of such filing fee.
(d) Each of the Company and its direct and indirect subsidiaries
(hereinafter, the "Subsidiaries") is duly incorporated and validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus. Each of the Company and its Subsidiaries is duly qualified to do
business as a foreign corporation and in good standing in each jurisdiction in
which the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or to
be in good standing would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its Subsidiaries, taken as a whole (hereinafter, a "Material
Adverse Effect"); and no proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification. Except as set forth in the Registration
Statement and Prospectus, each of the Company and the Subsidiaries is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities that are material to the conduct of its business, all of
which are valid and in full force and effect. Neither the Company nor any of its
Subsidiaries is in violation of their respective charter or bylaws and no event
has occurred which, with notice or lapse of time or both, would constitute a
breach or violation of any of the terms and provisions of, or constitute a
default under, any obligation, agreement, covenant or condition contained in any
bond, debenture, note or other evidence of indebtedness, or in any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which either the Company or any of its
Subsidiaries is a party or by which their properties may be bound. Neither the
Company nor any of its Subsidiaries is in violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, administrative
agency, regulatory body, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any Subsidiary or their
respective properties, except where such violation would not have a Material
Adverse Effect.
(e) The Company has full legal right, power and authority to enter
into this Agreement and the Representative's Warrant Agreement and perform the
transactions contemplated hereby and thereby. The Company has taken all
corporate action required by law, its charter or bylaws, as the case may be, to
be taken by it to authorize the execution, delivery and performance of the
transactions contemplated by this Agreement and the Representative's Warrant
Agreement, including the 4.25 to 1 reverse stock split described in the
Prospectus. Each of this Agreement and the Representative's Warrant Agreement
has been duly authorized, executed and delivered by the Company and is a valid
and binding agreement on the part of the Company, enforceable in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
4
<PAGE> 5
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles and
rules of law governing specific performance, estoppel, waiver, injunctive
relief, and other equitable remedies (regardless of whether enforcement is
sought in a proceeding at law or in equity). The making, execution and
performance of this Agreement and the Representative's Warrant Agreement by the
Company and the consummation of the transactions herein and therein contemplated
will not conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under, (i) any bond, debenture, note
or other evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which the Company or any Subsidiary is a party or by which their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any Subsidiary or (iii) any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, administrative agency, regulatory body,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any Subsidiary or their respective properties.
No consent, approval, authorization or order of or qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any Subsidiary or their respective properties
is required for the execution and delivery of this Agreement and the
Representative's Warrant Agreement, the consummation by the Company of the
transactions herein and therein contemplated, and the 4.25 to 1 reverse stock
split described in the Prospectus, all of which requirements have been satisfied
in all material respects, except such as may be required under the Act, by the
National Association of Securities Dealers, Inc. (the "NASD"), or under state or
other securities or Blue Sky laws.
(f) There is not pending or, to the Company's knowledge, threatened,
any action, suit, claim or proceeding against either the Company or any of its
Subsidiaries, any of the Company's or any of its Subsidiaries' officers, any of
their respective properties, assets or rights before any court, administrative
agency, regulatory body, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its Subsidiaries or
their respective officers or properties, or otherwise which (i) might,
individually or in the aggregate, result in any material adverse change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its Subsidiaries, taken as a whole (a "Material
Adverse Change"), or (ii) might prevent consummation of the transactions
contemplated hereby, or (iii) is required to be disclosed in the Registration
Statement or Prospectus and is not so disclosed. For purposes of this Agreement,
the phrases "to the Company's knowledge or "to the knowledge of the Company"
shall mean the knowledge of the senior management personnel of each of the
Company and its Subsidiaries. There are no agreements, contracts, leases or
documents of the Company or any Subsidiary of a character required to be
described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement by the Act or the Rules and
Regulations which have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement. Neither the Company nor any Subsidiary is a party or
subject to the provisions of any injunction, judgment, decree or order of any
court, administrative agency, regulatory body, government or governmental agency
or body domestic or foreign, that could be expected to result in a Material
Adverse Change. Each of the Company and its Subsidiaries has conducted and is
conducting its business in compliance with all applicable federal, state, local
and foreign statutes, laws, rules, regulations,
5
<PAGE> 6
ordinances, codes, decisions, decrees, directives and orders, except where the
failure to do so would not, singly or in the aggregate, have a Material Adverse
Effect.
(g) All outstanding shares of capital stock of each of the Company
and its Subsidiaries have been duly authorized and validly issued and are fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, and were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities. The
Company has an authorized, issued and outstanding capitalization as set forth in
the Prospectus under the caption "Capitalization." The capital stock of the
Company conforms to the description thereof contained in the Registration
Statement and the Prospectus (and such statements correctly state the substance
of the instruments defining the capitalization of the Company). The Shares to be
issued and sold by the Company hereunder have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement, and, when issued and
delivered by the Company against payment therefor in accordance with the terms
of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest assuming the Underwriters are
acquiring such shares in good faith and without actual knowledge of any adverse
claims with respect thereto. No preemptive right, co-sale right, registration
right, right of first refusal or other similar right of stockholders exists with
respect to any of the Shares or the issuance and sale thereof other than those
that have been satisfied or expressly waived prior to the date hereof and those
that will automatically expire upon and will not apply to the consummation of
the transactions contemplated on or before the Closing Date. No further approval
or authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale or transfer of the Shares except as
may be required under the Act or under state or other securities or Blue Sky
laws. Except as disclosed in the Registration Statement, the Prospectus and the
financial statements of the Company, and the related notes thereto included in
the Prospectus, the Company has no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus under
the caption "Management-Stock Option Plans" fairly and accurately presents the
information required to be shown with respect to such plans, arrangements,
options and rights. All outstanding options of the Company have been duly
authorized and issued in compliance with the option plan pursuant to which such
options were granted and with all federal and state securities laws and the
Nevada General Corporation Law.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
Material Adverse Change, (ii) any transaction that is material to either the
Company or any of its Subsidiaries, (iii) any obligation, direct or contingent,
incurred by either the Company or any of its Subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of either the Company or any of its
Subsidiaries, (v) any dividend or distribution of any kind declared, paid or
made on the capital stock of either the Company or any of its Subsidiaries, (vi)
any default in the payment of principal of or interest on any outstanding debt
obligations, or (vii) any
6
<PAGE> 7
loss or damage (whether or not insured) to the property of either the Company or
any of its Subsidiaries which has been sustained or will have been sustained,
which has a Material Adverse Effect.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its Subsidiaries has good and marketable
title to all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a Material Adverse Effect, (ii) the agreements to which either the Company
or any of its Subsidiaries is a party described in, or filed as exhibits to, the
Registration Statement and Prospectus are valid agreements, enforceable by the
Company or its Subsidiaries, as the case may be, except as the enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles and rules of law governing specific
performance, estoppel, waiver, injunctive relief and other equitable remedies
(regardless of whether enforcement is sought in a proceeding at law or in
equity) and, to the Company's knowledge, the other contracting party or parties
thereto are not in breach or default under any of such agreements, and (iii)
either the Company or one of its Subsidiaries has a valid and enforceable lease
for each real property described in the Registration Statement and Prospectus,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles and
rules of law governing specific performance, estoppel, waiver, injunctive relief
and other equitable remedies (regardless of whether enforcement is sought in a
proceeding at law or in equity). Except as set forth in the Registration
Statement and Prospectus, the Company and its Subsidiaries own or lease all such
properties as are necessary to its operations as now conducted or as proposed to
be conducted.
(j) Deloitte & Touche, L.L.P. ("D&T"), the Company's current
auditors, which have examined the consolidated financial statements of the
Company, together with the related schedules and notes, as of December 31, 1998,
and for the year then ended, filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations.
McGladrey & Pullen LLP ("M&P"), the Company's former auditors, which have
examined the consolidated financial statements of the Company, together with the
related schedules and notes, as of December 31, 1997, and for the year then
ended, filed with the Commission as a part of the Registration Statement, which
are included in the Prospectus, are independent accountants within the meaning
of the Act and the Rules and Regulations. The audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company and its Subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited consolidated financial information, filed
with the Commission as part of the Registration Statement, have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated therein. The
selected and summary consolidated
7
<PAGE> 8
financial and statistical data included in the Registration Statement fairly
present the information shown therein and have been compiled on a basis
consistent with the audited consolidated financial statements presented therein.
No other financial statements or schedules are required to be included in the
Registration Statement.
(k) Each of the Company and its Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(l) There are no issues related to the Company's, or any of its
Subsidiaries', preparedness for the Year 2000 that (i) are of a character
required to be described or referred to in the Registration Statement or
Prospectus or by the Act or the Rules and Regulations or by the Exchange Act or
the rules and regulations of the Commission thereunder which have not been
accurately described in the Registration Statement or Prospectus or (ii) might
reasonably be expected to result in any Material Adverse Change or have a
Material Adverse Effect. All internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company and each of its Subsidiaries fully comply with the Year 2000
Qualification Requirements. "Year 2000 Qualification Requirements" means that
the internal computer systems and each Constituent Component (as defined below)
of those systems and all computer-related products and each Constituent
Component (as defined below) of those products of the Company and each of its
Subsidiaries (i) have been reviewed to confirm that they store, process
(including sorting and performing mathematical operations, calculations and
computations), input and output data containing date-related information
correctly regardless of whether the date contains dates and times before, on or
after January 1, 2000, (ii) have been designated to ensure date and time entry
recognition and calculations that accommodate same-century and multi-century
formulas and date values, leap year recognition and calculations, and date-data
interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single-century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration.
(m) Each of the Company and its Subsidiaries has timely filed all
necessary federal, state, local and foreign income and franchise tax returns and
has paid all taxes shown thereon as due, and there is no tax deficiency that has
been or, might be asserted against the Company or any
8
<PAGE> 9
of its Subsidiaries that might have a Material Adverse Effect. All tax
liabilities are adequately provided for on the books of each of the Company and
its Subsidiaries.
(n) Each of the Company and its Subsidiaries maintains insurance
with insurers of recognized financial responsibility of the types and in the
amounts generally deemed prudent for its business and consistent with insurance
coverage maintained by similar companies in similar businesses or as otherwise
required by any agreement to which either the Company or a Subsidiary is a
party, including, but not limited to, insurance covering real and personal
property owned or leased by the Company or its Subsidiaries against theft,
damage, destruction, acts of vandalism, products liability, errors and
omissions, and all other risks customarily insured against, all of which
insurance is in full force and effect. Neither the Company nor any Subsidiary
has been refused any insurance coverage sought or applied for; and the Company
does not have any reason to believe that it will not be able to renew its or any
Subsidiary's existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect.
(o) The conditions for use of Form SB-2, as set forth in the General
Instructions thereto, have been satisfied.
(p) No labor disturbance by the employees of the Company or any of
its Subsidiaries exists or, to the Company's knowledge, is imminent. The Company
is not aware of any existing or imminent work stoppage or labor strike by the
employees of any of the Company's or any of its Subsidiaries' principal
suppliers, subcontractors, distributors (domestic or foreign) that might be
expected to result in a Material Adverse Change or to have a Material Adverse
Effect. No collective bargaining agreement exists with any of the Company's or
any of its Subsidiaries' employees and, to the Company's knowledge, no such
agreement is imminent.
(q) If any full-time employee identified in the Prospectus has
entered into any non-competition, non-disclosure, confidentiality or other
similar agreement with any party other than the Company or its Subsidiaries,
such employee is neither in violation thereof nor is expected to be in violation
thereof as a result of the business conducted or expected to be conducted by the
Company or its Subsidiaries as described in the Prospectus or such person's
performance of his or her obligations to the Company or any Subsidiary. To the
Company's knowledge, no consultant or scientific advisor of the Company or any
Subsidiary, excluding the Company's or any Subsidiary's professional advisors
(individually, a "Consultant" and collectively "Consultants"), is in violation
of any non-competition, non-disclosure, confidentiality or similar agreement
between such Consultant and any party other than the Company or a Subsidiary.
Each Consultant engaged by or on behalf of the Company or any of its
Subsidiaries to render services for the Company or any of its Subsidiaries has
entered into an agreement with the Company or such Subsidiary, as the case may
be, providing for terms and conditions of non-competition, non-disclosure and
confidentiality in connection with such services ("Consulting Agreements").
Assuming due authorization, execution and delivery of the Consulting Agreements
by each Consultant, the Consulting Agreements are the legal, valid, binding and
enforceable instruments of the Consultants, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting rights generally or by general
equitable principles and rules of law governing
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<PAGE> 10
specific performance estoppel, waiver, injunctive relief, and other equitable
remedies (regardless of whether enforcement is sought in a proceeding at law or
in equity).
(r) The Common Stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
approved for quotation on the Nasdaq National Market ("Nasdaq"). The Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from Nasdaq, nor has the Company received any notification that the
Commission, Nasdaq or the NASD is contemplating terminating such registration or
quotation.
(s) Each of the Company and its Subsidiaries owns or possesses
exclusive rights to use all patents, patent rights, patent licenses, inventions,
trade secrets, trademarks, service marks, trade names, copyrights, service
names, mask works, technology, know-how and other proprietary intellectual
rights which are necessary to conduct its business as now conducted and as
described in the Registration Statement and Prospectus. The Company or its
assignor has duly and properly filed with the U.S. Patent and Trademark Office
and/or respective patent offices in foreign countries all pending patent
applications (the "Patent Applications"). All issued United States patents and
Patent Applications have been properly assigned to the Company, and all
documents reflecting such assignment to the Company have been properly recorded
in the U.S. Patent and Trademark Office. The information contained in the
Registration Statement and Prospectus concerning patents owned by or licensed to
the Company or its Subsidiaries is accurate in all material respects. Neither
the Company nor any of its Subsidiaries has received any notice of, nor has it
any knowledge of, any infringement of or conflict with asserted rights of either
the Company or any of its Subsidiaries by others with respect to any patents,
patent rights, inventions, trade secrets, trademarks, service marks, trade
names, copyrights, mask works, technology or know-how. Neither the Company nor
any of it Subsidiaries has received any notice of, nor has it any knowledge of,
any infringement of conflict with asserted rights of others with respect to or
issue regarding the enforceability of, any patent, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names or copyrights
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, might have a Material Adverse Effect, except as disclosed in
the Registration Statement and the Prospectus.
(t) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it is not and will not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
(u) Each of the Company and its Subsidiaries is conducting business
in compliance with all applicable statutes, rules, regulations and orders
administered or issued by any domestic or foreign administrative agency,
regulatory body, government or governmental agency in the jurisdictions in which
each is conducting business except where such noncompliance would not result in
a Material Adverse Effect.
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(v) Each of the Company and its Subsidiaries has submitted all
reports and other documentation necessary to be submitted in accordance with all
foreign regulatory orders, laws and regulations in jurisdictions in which the
Company or such Subsidiary is conducting business except where such failure
would not have a Material Adverse Effect. Neither the Company nor any such
Subsidiaries has received notification of violation of any applicable statute,
rule, regulation or order administered or issued by any foreign administrative
agency, regulatory body, government or governmental agency in foreign
jurisdictions in which it is conducting business.
(w) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its Subsidiaries is in compliance with
all laws, orders, rules and regulations relating to the use, treatment, storage
and disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to their respective businesses
except where failure to do so would not have a Material Adverse Effect, (ii)
neither the Company nor any of its Subsidiaries has received notice from any
administrative agency, regulatory body, government, governmental authority or
third party of an asserted claim under Environmental Laws, (iii) neither the
Company nor any of its Subsidiaries will be required to make material capital
expenditures to comply or cause its Subsidiaries to comply with Environmental
Laws in the foreseeable future and (iv) no property which is, or has been,
owned, leased or occupied by the Company or any of its Subsidiaries has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended, or otherwise designated as
a contaminated site under applicable state or local law.
(x) Each employee benefit plan, within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
that is maintained, administered or contributed to by the Company or any of its
Subsidiaries for employees or former employees of the Company or any of its
Subsidiaries has been maintained in compliance with its respective terms and the
requirements of any applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Internal Revenue Code of 1986, as
amended (the "Code"). Each employee benefit plan intended to be qualified under
Section 401(a) of the Code has either obtained from the Internal Revenue Service
("IRS") a favorable determination letter as to its qualified status under the
Code, including all amendments to the Code effected by the Tax Reform Act of
1986 and subsequent legislation, or has applied to the IRS for such a
determination letter prior to the requisite period under applicable Treasury
Regulations or IRS pronouncements in which to apply for a determination letter
and to make any amendments necessary to obtain a favorable determination. No
prohibited transaction, within the meaning of Section 406 of ERISA or Section
4975 of the Code, has occurred with respect to any such plan, excluding
transactions effected pursuant to a statutory or administrative exemption. For
each such plan which is subject to the funding rules of Section 412 of the Code
or Section 302 of ERISA, no "accumulated funding deficiency", as defined in
Section 412 of the Code, has been incurred, whether or not waived, and the fair
market value of the assets of each such plan (excluding for these purposes
accrued but unpaid contributions) exceeded the present value of all benefits
accrued under such plan determined using reasonable actuarial assumptions.
Neither the Company nor any of its Subsidiaries has been a party to or made
contributions to or otherwise incurred any obligation under any employee benefit
plan
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that was subject to Title IV of ERISA or Section 412 of the Code, and any
"multi-employer plan" as defined in Section 3(37) of ERISA.
With respect to each employee benefit plan, the Company and each
Subsidiary has complied with (i) the applicable health care continuation and
notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") and the proposed regulations thereunder, (ii) the applicable
requirements of the Family and Medical Leave Act of 1993 and the regulations
thereunder, and (iii) the applicable requirements of the Health Insurance
Portability and Accountability Act of 1996 and the temporary regulations
thereunder. Neither the Company nor any Subsidiary has any material obligations
under COBRA with respect to any former employees or qualifying beneficiaries
thereunder. Neither the Company nor any of its Subsidiaries are parties to a
retiree medical plan.
(y) The Company has not distributed, and will not distribute prior
to the later of (i) the Closing Date or any date on which Option Shares are to
be purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(z) Neither the Company nor any of its Subsidiaries has at any time
during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(aa) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(bb) Except as otherwise set forth in the Registration Statement and
the Prospectus, each officer and director of the Company, and each person listed
on Schedule 1 attached hereto has agreed in writing that such person will not,
except as described below, for a period of 180 days from the date of the final
Prospectus (the "Lock-Up Period"), sell, offer to sell, solicit an offer to buy,
contract to sell, loan, pledge, grant any option to purchase, or otherwise
transfer or dispose of (collectively, a "Disposition"), any shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
Common Stock (collectively, "Securities"), now owned or hereafter acquired by
such person or with respect to which such person has or hereafter acquires the
power of disposition otherwise than (i) on the transfer of shares of Common
Stock or Securities during such person's lifetime by bona fide gift or upon
death by will or intestacy, provided that any transferee agrees to be bound by
the Lock-Up Agreement, and (ii) on the transfer or other disposition of shares
of Common Stock or Securities as a distribution to limited partners or
stockholders of such person, provided that the distributees thereof agree to be
bound by the terms of the Lock-Up Agreement. The foregoing restriction has been
expressly agreed to preclude the holder of the Securities from engaging in any
hedging, pledge or other transaction which is designed to or may
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<PAGE> 13
reasonably be expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than such stockholder. Such prohibited hedging, pledge or other
transactions would include, without limitation, any short sale (whether or not
against the box), any pledge of shares covering an obligation that matures, or
could reasonably mature during the Lock-Up Period, or any purchase, sale or
grant of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from any Securities. Furthermore, such person has
also agreed and consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held by such
person except in compliance with the restrictions described in this subsection
(bb). The Company has provided to counsel for the Underwriters ("Underwriters'
Counsel") a complete and accurate list of all securityholders of the Company as
of [May 15, 1999] and the number and type of securities held by each
securityholder. In addition, each officer and director of the Company, and each
person listed on Schedule 1 attached hereto (excluding Blackwater Capital Group,
L.L.C., Blackwater Capital Partners, L.P. or their assigns) also has agreed
pursuant to the Lock-Up Agreement that the Representative shall have an
irrevocable preferential right for a period of two years from the termination of
the Lock-Up Period to purchase for its account or to sell for the account of
each such officer, director or securityholder any Securities of the Company that
any of such officers, directors, or stockholders may seek to sell under Rule 144
promulgated under the Act. Each such officer, director, or securityholder will
consult the Representative with regard to any such offering and will offer the
Representative the opportunity to purchase or sell any such Securities on terms
not more favorable to such officer, director or securityholder than they can
secure elsewhere. The Company has provided to Underwriters' Counsel true,
accurate and complete copies of all of the agreements pursuant to which its
officers, directors and stockholders have agreed to such or similar restrictions
(the "Lock-up Agreements") presently in effect or effected hereby. The Company
hereby represents and warrants that it will not release any of its officers,
directors or other stockholders from any Lock-up Agreements currently existing
or hereafter effected without the prior written consent of Cruttenden Roth
Incorporated.
(cc) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any stockholder who owns beneficially more than five
percent (5%) of the Common Stock or any of the members of the families of any of
them, except as disclosed in the Registration Statement and the Prospectus.
(dd) Other than the Representative, on behalf of the several
Underwriters, no person is or will be owed any finder's fee or commission or
similar payment in connection with the transactions contemplated by this
Agreement, except as disclosed in the Registration Statement.
(ee) All offers and sales of capital stock of the Company prior to
the date hereof were at all relevant times duly registered or exempt from the
registration requirements of the Act and were duly registered or subject to an
available exemption from the registration requirements of the applicable state
securities or Blue Sky laws. There are no persons with registration or other
similar
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<PAGE> 14
rights to have any securities registered pursuant to the Registration Statement
or otherwise registered by the Company under the Act, other than those which
have been waived or complied with.
(ff) No relationship, direct or indirect, exists between or among
the Company on the one hand and the directors, officers, stockholders, customers
or suppliers of the Company on the other hand, that is required by the Act or
the 1934 Act or the Rules and Regulations to be described in the Registration
Statement and the Prospectus that is not described as so required.
(gg) The Preliminary Prospectuses and Prospectus delivered to the
Underwriters for use in connection with this offering were identical to the
versions of the Preliminary Prospectuses and Prospectuses created to be
transmitted to the Commission for filing via the Electronic Data Gathering
Analysis and Retrieval System ("EDGAR"), except to the extent permitted by
Regulation S-T.
(hh) The Representative's Warrants have been duly and validly
authorized by the Company and upon delivery to you in accordance with the
Representative's Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company.
(ii) The Representative's Warrant Stock has been duly authorized and
reserved for issuance upon the exercise of the Representative's Warrants and
when issued upon payment of the exercise price therefore will be validly issued,
fully paid and non-assessable shares of Common Stock of the Company.
3. REPRESENTATIONS AND WARRANTIES OF SELLING SECURITYHOLDER. The Selling
Securityholder represents and warrants to, and agrees with, each of the several
Underwriters that:
(a) The Selling Securityholder has full power to enter into this
Agreement and to sell, assign, transfer and deliver to the Underwriters the
Shares to be sold by the Selling Securityholder hereunder in accordance with the
terms of this Agreement. This Agreement has been duly executed and delivered by
the Selling Securityholder.
(b) The Selling Securityholder has duly executed and delivered a
power of attorney and custody agreement (the "Power-of-Attorney" and the
"Custody Agreement", respectively) in the form heretofore delivered to the
Representative, appointing R. Terren Dunlap and Robert J. Brilon as the Selling
Securityholder's attorney-in-fact (the "Attorney-in-Fact") with authority to
execute, deliver and perform this Agreement on behalf of the Selling
Securityholder and appointing American Securities Transfer & Trust as custodian
thereunder (the "Custodian"). Certificates in negotiable form, endorsed in blank
or accompanied by blank stock powers duly executed, with signatures
appropriately guaranteed, representing the Shares to be sold by the Selling
Securityholder hereunder have been deposited with the Custodian pursuant to the
Custody Agreement for the purpose of delivery pursuant to this Agreement. The
Selling Securityholder has full power (corporate and other) to enter into the
Custody Agreement and the Power-of-Attorney and to perform its obligations under
the Custody Agreement. The delivery of the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by the Selling
Securityholder and, assuming due authorization, execution and delivery by the
Custodian, are the legal, valid, binding and enforceable instruments
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<PAGE> 15
of the Selling Securityholder. The Selling Securityholder agrees that each of
the Shares represented by the certificates on deposit with the Custodian is
subject to the interests of the Underwriters hereunder, that the arrangements
made for such custody, the appointment of the Attorney-in-Fact and the right,
power and authority of the Attorney-in-Fact to execute and deliver this
Agreement, to agree on the price at which the Shares (including the Selling
Securityholder's Shares) are to be sold to the Underwriters, and to carry out
the terms of this Agreement, are to that extent irrevocable and that the
obligations of the Selling Securityholder hereunder shall not be terminated,
except as provided in this Agreement or the Custody Agreement, by any act of the
Selling Securityholder, by operation of law or otherwise, or by its liquidation
or dissolution or by the occurrence of any other event. If the Selling
Securityholder shall liquidate or dissolve, or if any other event should occur,
before the delivery of such Shares hereunder, the certificates for such Shares
deposited with the Custodian shall be delivered by the Custodian in accordance
with the respective terms and conditions of this Agreement as if such
liquidation or dissolution or other event had not occurred, regardless of
whether the Custodian or the Attorney-in-Fact shall have received notice
thereof.
(c) The Selling Securityholder is the lawful owner of the Shares to
be sold by the Selling Securityholder hereunder and upon sale and delivery of,
and payment for, such Shares, as provided herein, the Selling Securityholder
will convey good and marketable title to such Shares, free and clear of any
security interests, liens, encumbrances, equities, claims or other defects
(assuming the Underwriters are acquiring such Shares in good faith and without
actual knowledge of any adverse claims with respect thereto).
(d) The Selling Securityholder has not, directly or indirectly, (i)
taken any action designed to cause or result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares or (ii) since the filing of the Registration Statement
(A) sold, bid for, purchased, or paid anyone any compensation for soliciting
purchases of, the Shares or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company (except for the sale of Shares by the Selling Securityholder under this
Agreement).
(e) To the extent that any statements or omissions are made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
information furnished to the Company by the Selling Securityholder, such
Preliminary Prospectus did, and the Registration Statement and the Prospectus
and any amendments or supplements thereto, when they become effective or are
filed with the Commission, as the case may be, will, conform in all material
respects to the requirements of the Act and the Rules and Regulations thereunder
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, in the light of the circumstances under which they are made,
not misleading. The Selling Securityholder has reviewed the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus) and
the Registration Statement, and the information regarding the Selling
Securityholder set forth therein under the caption "Security Ownership of
Certain Beneficial Owners and Management" is complete and accurate.
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<PAGE> 16
(f) The sale of the Shares by the Selling Securityholder pursuant to
this Agreement is not prompted by any adverse information concerning the Company
that is not set forth in the Registration Statement or the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(g) The sale of the Shares to the Underwriters by the Selling
Securityholder pursuant to this Agreement, the compliance by the Selling
Securityholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein contemplated do
not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained, such as may be required under state securities or Blue Sky laws and,
if the registration statement filed with respect to the Shares (as amended) is
not effective under the Act as of the time of execution hereof, such as may be
required (and shall be obtained as provided in this Agreement) under the Act or
(ii) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Selling
Securityholder is a party or by which the Selling Securityholder or any of the
Selling Securityholder's properties are bound, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to the Selling Securityholder.
4. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares which is set forth opposite the name of such
Underwriter in Schedule A hereto (subject to adjustment as provided in Section
11).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 4 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in same-day funds, payable to the order
of the Company or by wire transfer in same day funds, at the offices of Snell &
Wilmer L.L.P., Phoenix, Arizona (or at such other place as may be agreed upon
between the Representative and the Company), at 7:00 A.M. Pacific daylight
savings time, (a) on the third (3rd) full business day following the first day
that Shares are traded or (b) if this Agreement is executed and delivered after
1:30 P.M. Pacific daylight savings time, the fourth (4th) full business day
following the day that this Agreement is executed and delivered or (c) at such
other time and date not later than seven (7) full business days following the
first day that Shares are traded as the Representative and the Company may
determine (or at such time and date to which payment and delivery shall have
been postponed pursuant to Section 11 hereof), such time and date of payment and
delivery being herein called the "Closing Date;" provided, however, that if the
Company has not made available to the Representative copies of the Prospectus
within the time provided in Section 5(a)(4) hereof, the Representative may, in
its sole discretion, postpone the Closing Date until no later than two (2) full
business days following delivery of copies of the Prospectus to the
Representative. The certificates for the Firm Shares to be so delivered will be
made available to you at such office
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<PAGE> 17
or such other location as you may reasonably request for checking at least one
(1) full business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representative so elects,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representative.
It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make a public offering (as such term is described in
Section 12 hereof) of the Firm Shares at a public offering price of $_____ per
share. After the public offering, the several Underwriters may, in their
discretion, vary the public offering price.
5. FURTHER AGREEMENTS OF THE COMPANY AND SELLING SECURITYHOLDER.
(a) The Company covenants and agrees with each of Underwriters that:
(1) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible. The Company will use its best efforts
to cause any 462 Registration Statement as may be required subsequent to the
date the Registration Statement is declared effective to become effective as
promptly as possible. The Company will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement, any
subsequent amendment to the Registration Statement or any 462 Registration
Statement has become effective or any supplement to the Prospectus has been
filed. If the Company omitted information from the Registration Statement at the
time it was originally declared effective in reliance upon Rule 430A(a) of the
Rules and Regulations, the Company will provide evidence satisfactory to you
that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission. If the Company files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the Company will provide
evidence satisfactory to you that the Prospectus and term sheet meeting the
requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations
have been filed, within the time period prescribed, with the Commission pursuant
to subparagraph (7) of Rule 424(b) of the Rules and Regulations. If for any
reason the filing of the final form of Prospectus is required under Rule
424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed with the
Commission within the time period prescribed. The Company will notify you
promptly of any request by the Commission for the amending or supplementing of
the Registration Statement or
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the Prospectus or for additional information. Promptly upon your request, the
Company will prepare and file with the Commission any amendments or supplements
to the Registration Statement or Prospectus which, in the opinion of
Underwriters' Counsel, may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters. The Company will promptly
prepare and file with the Commission, and promptly notify you of the filing of,
any amendments or supplements to the Registration Statement or Prospectus which
may be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. In case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act. The Company will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations and the provisions of this Agreement.
(2) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal at the earliest possible moment if such stop order should be issued.
(3) The Company will arrange for qualification (including by
providing full cooperation with Underwriter's Counsel, whose services in this
matter are required and which you and the Company will seek to expedite) of the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, provided,
however, that the Company shall not be required in connection therewith or as a
condition thereof to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction in which it is not otherwise
required to be so qualified or to so execute a general consent to service of
process. In each jurisdiction in which the Shares shall have been qualified as
above provided, the Company will make and file such statements and reports in
each year as are or may be required by the laws of such jurisdiction for such
purpose.
(4) The Company will furnish to you, as soon as available,
and, in the case of the Prospectus and any term sheet or abbreviated term sheet
under Rule 434, in no event later than the first full business day following the
first day that Shares are traded, copies of each Registration Statement (two of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
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<PAGE> 19
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if the Representative, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules and
Regulations, the Company shall provide to you copies of a Preliminary Prospectus
updated in all respects through the date specified by you in such quantities as
you may from time to time reasonably request.
(5) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statements.
(6) During a period of five (5) years after the date hereof,
the Company will furnish to its stockholders as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and, upon request by a
stockholder, unaudited quarterly reports of operations for each of the first
three quarters of the fiscal year, and will furnish to you and the other several
Underwriters hereunder, upon request (i) concurrently with furnishing such
reports to its stockholders, statements of operations of the Company for each of
the first three (3) quarters in the form furnished to the Company's
stockholders, (ii) concurrently with furnishing to its stockholders, a balance
sheet of the Company as of the end of such fiscal year, together with statements
of operations, of stockholders' equity, and of cash flows of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent certified public accountants, (iii) as soon as they are available,
copies of all reports (financial or other) mailed to stockholders, (iv) as soon
as they are available, copies of all reports and financial statements furnished
to or filed with the Commission, any securities exchange or Nasdaq, (v) every
material press release and every material news item or article in respect of the
Company or its affairs which was generally released to stockholders or prepared
by the Company, and (vi) any additional information of a public nature
concerning the Company, or its business which you may reasonably request. During
such five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and such subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(7) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(8) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(9) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations
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hereunder, or if the Company shall terminate this Agreement, or if the
Underwriters shall terminate this Agreement pursuant to Section 12(b)(i), the
Company will pay the several Underwriters for all out-of-pocket expenses
(including fees and disbursements of Underwriters' counsel) incurred by the
Underwriters in investigating or preparing to market or marketing the Shares and
to the extent any advances to the Underwriters exceed such expenses, the
Underwriters shall return such excess to the Company.
(10) If at any time during the ninety (90) day period after
the Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(11) During the Lock-up Period, the Company will not, without
the prior written consent of the Representative, effect the Disposition of,
directly or indirectly, any Securities other than the sale of the Firm Shares
and the Option Shares hereunder and the Company's issuance of options or Common
Stock under the Company's presently authorized stock option and stock purchase
plans described in the Registration Statement and the Prospectus.
(12) The Company will cause the Securities to be included for
quotation on the Nasdaq National Market on or prior to the Closing Date.
(13) The Company will take all necessary corporate action to
effect the 4.25 to 1 reverse stock split as contemplated by the Prospectus on or
prior to the Effective Date.
(14) Promptly following the Closing Date, the Compensation
Committee of the Company's Board of Directors will hold a meeting or meetings to
discuss, consider, and establish annual compensation levels for the Company's
Chief Executive Officer, Chief Operating Officer, and President and Chief
Financial Officer in accordance with their employment agreements.
(b) If the Underwriters purchase the Option Shares from the Selling
Securityholder, then the Selling Securityholder covenants and agrees with each
of the Underwriters that:
(1) The Selling Securityholder will not, directly or
indirectly, without the prior written consent of the Representative, on behalf
of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, pledge, grant of any option to purchase or other sale or
disposition) of any Securities legally or beneficially owned by the Selling
Securityholder or any securities convertible into, or exchangeable or
exercisable for, Securities for a period of 180 days after the date hereof
except as provided in this Agreement.
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(2) The Selling Securityholder will not, directly or
indirectly, (i) take any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (ii) (A) sell, bid for, purchase,
or pay anyone any compensation for soliciting purchases of, the Shares or (B)
pay or agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of Shares by
the Selling Securityholder under this Agreement).
(3) The Selling Securityholder acknowledges the receipt of
valuable consideration under this Agreement in connection with the sale of the
Shares hereunder and agrees to be bound by all terms of this Agreement
applicable to the Selling Securityholder.
6. EXPENSES.
(a) The Company agrees with each Underwriter that:
(1) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
printing of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreement, all Blue Sky filing fees and related expenses, the
Underwriters' Questionnaire and Power of Attorney, and any instruments related
to any of the foregoing; the issuance and delivery of the Shares hereunder to
the several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars' fees;
the fees and disbursements of counsel for the Company; all fees and other
charges of the Company's independent certified public accountants; the cost of
furnishing to the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus, and
any amendments or supplements to any of the foregoing; NASD filing fees and the
cost of qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and fees and disbursements of Underwriters'
Counsel in connection with such NASD filings and Blue Sky qualifications); and
all other expenses directly incurred by the Company in connection with the
performance of its obligations hereunder. The provisions of this Section 6(a)(1)
are intended to relieve the Underwriters from the payment of the expenses and
costs which the Company hereby agrees to pay.
(2) In addition to its other obligations under Section 6(a)(1)
hereof, the Company will pay to you a nonaccountable expense allowance equal to
_____% of the gross sales price of the Shares to the public. This nonaccountable
expense allowance with respect to the Firm Shares shall be paid to you on the
Closing Date and the nonaccountable expense allowance with respect to the Option
Shares shall be paid to you on the closing of the sale to you of such Option
Shares. The Company has previously paid to you a fee of $25,000, which shall be
credited to this nonaccountable expense allowance.
(3) In addition to its other obligations under Section 9(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation,
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inquiry or other proceeding described in Section 9(a) hereof, it will reimburse
the Underwriters on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriters for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Underwriters shall promptly return
such payment to the Company together with interest, compounded daily, determined
on the basis of the prime rate (or other commercial lending rate for borrowers
of the highest credit standing) listed from time to time in The Wall Street
Journal which represents the base rate on corporate loans posted by a
substantial majority of the nation's thirty (30) largest banks (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section 9(b)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 9(b) hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(c) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 6(a)(3) and 6(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 6(a)(3) and 6(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 9(a) and 9(b) hereof or the obligation to contribute to expenses which
is created by the provisions of Section 9(d) hereof.
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7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Shares as provided herein shall be
subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of its obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., Pacific Standard time, on the date following the date of this
Agreement, or such later date and time as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, the
registration, authorization, issue, sale and delivery of the Shares, and the
one-for- 4.25 reverse stock split contemplated by the Prospectus, shall have
been satisfactory to Underwriters' Counsel, and such counsel shall have been
furnished with such papers and information as they may have requested to enable
them to pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its Subsidiaries, taken as a whole, from that set
forth in the Registration Statement or Prospectus, which, in your sole judgment,
is material and adverse and that makes it, in your sole judgment, impracticable
or inadvisable to proceed with the public offering of the Shares as contemplated
by the Prospectus.
(d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of Quarles & Brady, LLP, counsel for the Company, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, addressed to the Underwriters (and stating that it may be
relied upon by Snell & Wilmer, L.L.P., Underwriters' counsel, in rendering its
opinion pursuant to Section 7(g) of this Agreement) and with reproduced copies
or signed counterparts thereof for each of the Underwriters, to the effect that:
(1) Each of the Company and its Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation;
(2) Each of the Company and its Subsidiaries has the corporate
power and authority to own, lease and operate its properties and to conduct its
respective business as described in the Registration Statement and the
Prospectus;
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(3) Each of the Company and its Subsidiaries is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction, if any, in which the ownership or leasing of its respective
properties or the conduct of its respective businesses requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its Subsidiaries, taken as a whole;
(4) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption "Capitalization"
as of the dates stated therein; the issued and outstanding shares of capital
stock of the Company have been duly and validly issued and are fully paid and
nonassessable, and will not have been issued in violation of the Company's
charter or bylaws or, to such counsel's knowledge, in violation of or subject to
any preemptive right, co-sale right, registration right, right of first refusal
or other similar right, and all offers and sales of the Company's capital stock
were at all relevant times exempt from the registration or qualification
requirements of the Act and state securities laws. The Company's outstanding
options as described in the Prospectus have been duly authorized and shares of
Common Stock have been reserved for issuance pursuant to the terms of the
Company's stock option plans;
(5) The Firm Shares or the Option Shares, as the case may be,
to be issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully paid
and nonassessable and will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first refusal
or, other similar right contained in the Company's charter or bylaws or, to such
counsel's knowledge, in any other agreement or contract to which the Company is
a party; and the forms of certificates evidencing the Shares comply with Nevada
law;
(6) The Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(7) The Company has the corporate power and authority to enter
into the Representative's Warrant Agreement and to issue, sell and deliver to
the Representative the Representative's Warrants to be issued and sold by it
thereunder;
(8) Each of this Agreement and the Representative's Warrant
Agreement has been duly authorized by all necessary corporate action on the part
of the Company and has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by you, is a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except insofar as indemnification and contribution provisions may be limited by
applicable law and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
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(9) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been instituted or are
pending or, to such counsel's knowledge, threatened under the Act;
(10) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements (including
supporting schedules), financial data derived therefrom and other financial and
statistical information included therein, as to which such counsel need express
no opinion), as of the effective date of the Registration Statement, and with
respect to the Prospectus as of August ___, 1999, complied as to form in all
material respects with the requirements of the Act and the applicable Rules and
Regulations;
(11) The information in the Prospectus under the captions (a)
"Description of Securities," "Market for Common Stock and Related Stockholder
Matters - Shares Eligible For Future Sale" and "Business-Legal Proceedings," to
the extent that it constitutes matters of law or legal conclusions, has been
reviewed by such counsel and is a fair summary of such matters and conclusions;
(12) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the Act and the
applicable Rules and Regulations;
(13) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement that are
not described or referred to therein or filed as required;
(14) The performance of this Agreement and the
Representative's Warrant Agreement and the consummation of the transactions
herein and therein contemplated (other than performance of the Company's
indemnification obligations hereunder or under the Representative's Warrant
Agreement, concerning which no opinion need be expressed) will not (a) result in
any violation of the charter or bylaws of the Company or any of its Subsidiaries
or (b) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any bond, debenture, note or other
evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company or any of its Subsidiaries is a party or by which its properties are
bound, and which is known to such counsel, or any applicable statute, rule or
regulation generally applicable to transactions of the type contemplated
hereunder or to such counsel's knowledge, any order, writ or decree of any
court, government or governmental agency or body having jurisdiction over the
Company or any of its Subsidiaries or any of their respective properties or
operations which such breach, conflict, violation or default is reasonably
likely to have a Material Adverse effect.;
(15) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its Subsidiaries or any of the Company's
or its Subsidiaries' properties or operations is necessary
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in connection with the consummation by the Company of the transactions herein
contemplated, except such as have been obtained under the Act or such as may be
required under state or other securities or Blue Sky laws in connection with the
purchase and the distribution of the Shares by the Underwriters;
(16) The 4.25 to one reverse stock split contemplated by the
Prospectus has been duly authorized by all necessary corporate action, no
consent, approval, authorization or order of or qualification with any court,
government or governmental agency or body having jurisdiction over the Company
or any of its Subsidiaries or any of the Company's or its Subsidiaries'
properties or operations, or the Company's stockholders and Board of Directors,
is necessary to effect the reverse stock split as contemplated by the
Prospectus, except such as have been obtained prior to the date hereof, and the
Company has effected the reverse stock split as contemplated by the Prospectus
on or prior to the Effective Date.
(17) There are no legal or governmental proceedings pending
or, to such counsel's best knowledge, threatened against the Company or any of
its Subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and Regulations, other than
those described therein;
(18) To such counsel's knowledge, each of the Company and its
Subsidiaries is not in violation of its respective charter or bylaws and no
breach or default exists, and to such counsel's knowledge, no event has occurred
which, with notice or lapse of time or both, would constitute a breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which either the Company or any of its
Subsidiaries is a party or by which their respective properties are bound, and
which is known to such counsel, or any applicable statute, rule or regulation or
any order, writ or decree of any court, government or governmental agency or
body having jurisdiction over the Company or any of its Subsidiaries or any of
the Company's or any of its Subsidiaries properties or operations, except such
breaches, violations or defaults which would not have a Material Adverse Effect.
(19) Each of the Company and its Subsidiaries is not, and upon
the sale of the Shares as herein contemplated will not be, an "investment
company,' as defined under the Investment Company Act of 1940, as amended.
(20) Each of the Company and its Subsidiaries is in compliance
with, and conducts its respective businesses in conformity with, all applicable
laws and regulations under the laws of the states of its incorporation and
foreign qualifications and the federal laws of the United States, relating to
the operation of its business as described in the Registration Statement, except
to the extent that any failure so to comply or conform would not have a Material
Adverse Effect;
(21) Except as set forth in the Registration Statement and
Prospectus, no holders of Common Stock or other securities of the Company have
registration rights with respect to securities of the Company and, except as set
forth in the Registration Statement and Prospectus,
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all holders of securities of the Company having rights to registration of such
shares of Common Stock or other securities, because of the filing of the
Registration Statement by the Company, have, with respect to the offering
contemplated thereby, waived such rights or such rights have expired by reason
of lapse of time following notification of the Company's intent to file the
Registration Statement;
(22) The Representative's Warrants have been duly and validly
authorized by the Company and upon delivery to the Representative in accordance
with the Representative's Warrant Agreement will be duly issued and legal, valid
and binding obligations of the Company;
(23) The Representative's Warrant Stock to be issued by the
Company pursuant to the terms of the Representative's Warrant has been duly
authorized and, upon issuance and delivery against payment therefore in
accordance with the terms of the Representative's Warrant Agreement, will be
duly and validly issued and fully paid and nonassessable, and to such counsel's
knowledge, will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of stockholders;
(24) If the Company elects to rely on Rule 434, the Prospectus
is not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including such
information that is permitted to be omitted pursuant to Rule 430A); and
(25) The conditions for use of Form SB-2, as set forth in the
General Instructions thereto, have been satisfied.
In addition, such counsel shall state that such counsel has acted as
outside corporate legal counsel to the Company and participated in conferences
with officials and other representatives of the Company, the Representative,
Underwriters' Counsel and the independent certified public accountants of the
Company, at which such conferences the contents of the Registration Statement
and Prospectus and related matters were discussed, and although they have not
verified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel which leads such counsel to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the Closing Date and on any later date on which Option Shares are to
be purchased, the Registration Statement and any amendment or supplement thereto
(other than the financial statements including supporting schedules, other
financial information derived therefrom and other financial and statistical
information included therein, as to which such counsel need express no opinion)
contained any 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 at the Closing Date or any later date on which the Option
Shares are to be purchased, as the case may be, the Registration Statement, the
Prospectus and any amendment or supplement thereto (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
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Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of Arizona upon
opinions of local counsel, and as to matters of fact, to the extent such counsel
deems proper, upon certificates of responsible officers of the Company, and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. References to the
Registration Statement and the Prospectus in this subsection (d) shall include
any amendment or supplement thereto at the date of such opinion. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representative of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, the following
opinion of Dorn, McEachran, Jambor & Keating, intellectual property counsel for
the Company, dated the Closing Date or such later date on which Option Shares,
as the case may be, are to be purchased, addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters:
(1) "Intellectual Property" means: (a) currently existing
domestic and foreign patents and patent applications; (b) currently existing
domestic (including federal and state) and foreign trademarks, service marks,
trade names, trade dress, domain names, and all applications, registrations,
renewals related thereto; and (c) currently existing domestic and foreign
copyright applications and copyright registrations, including renewals related
thereto.
(2) Exhibit A attached hereto is a complete and accurate
listing of all Intellectual Property owned by, registered to, or assigned to the
Company. All right, title, and interest to the Intellectual Property listed in
Exhibit A is valid and subsisting.
(3) The Intellectual Property has been properly assigned to
the Company, and, except as otherwise stated in counsel's opinion, the Company
is currently listed as the sole assignee of record in the respective patent
office, trademark office, copyright office, or other appropriate government or
administrative office.
(4) The Company is unaware of any irregularities in the chain
of title to any of the Intellectual Property.
(5) The Company has taken all necessary and desirable action
to maintain and protect each item of Intellectual Property. In this respect, all
currently pending domestic and foreign applications related to the procurement,
establishment, or registration of the Intellectual Property are being diligently
prosecuted, and none of the pending domestic and foreign applications has been
fully rejected or abandoned.
(6) The Company has not licensed, assigned, sold, or otherwise
transferred any of the rights (or any portion of the rights) to the Intellectual
Property to any third party, with the exception that Monopanel Technologies,
Inc. has a nonexclusive license under U.S. patents 5,523,730, 5,666,096 and
5,867,082 that may be terminated by the Company on any anniversary date thereof
upon sixty days notice. The anniversary date is April 10.
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(7) All domestic and foreign applications related to the
procurement, establishment, or registration of the Intellectual Property have
been properly executed by the respective inventor(s), an authorized
representative of a corporate applicant, an authorized attorney or legal
representative, or an appropriate person or entity in accordance with the
respective governing laws, rules, regulations, and procedures.
(8) All domestic and foreign applications related to the
procurement, establishment, or registration of the Intellectual Property have
been properly filed and prosecuted by the respective inventor(s), an authorized
representative of a corporate applicant, an authorized attorney or legal
representative, or an appropriate person or entity in accordance with the
respective governing laws, rules, regulations, and procedures.
(9) In the opinion of counsel, all pertinent prior art
references known to the Company or the Company's representative during the
prosecution of the U.S. patents and the U.S. applications were disclosed to the
PTO or cited by the PTO. To the best of such counsel's knowledge, no
misrepresentations or mischaracterizations of the prior art were made during the
prosecution of any foreign or domestic patent application related to the
Intellectual Property. To the best of such counsel's knowledge, the provisions
of 37 C.F.R. Section 1.56 were fully complied with during the prosecution of the
U.S. patents and the U.S. applications related to the Intellectual Property.
(10) Counsel is unaware of any irregularities in the
prosecution of any foreign or domestic applications relating to the procurement,
establishment, or registration of the Intellectual Property, where such
irregularities may impact the validity or enforceability of the Intellectual
Property or otherwise impact the Company's rights in the Intellectual Property.
(11) Regarding any pending patent applications listed in
Exhibit A, counsel is unaware of any circumstances that would adversely affect
the ability of the Company to obtain validly issued patents having reasonable
claim scope.
(12) Except as set forth in the Registration Statement,
counsel is unaware of any actual or threatened legal, governmental, or other
third party action, suit, claim, or proceeding (including those relating to
infringement) relating to Intellectual Property rights owned by or affecting the
business operations of the Company which are pending or threatened against the
Company and which action, suit, claim, or proceeding would, with respect to any
of the foregoing, have a material adverse effect on the condition (financial or
other), earnings, operations, business, or business prospects of the Company.
(13) Except as set forth in the Registration Statement, to the
best of such counsel's knowledge, the Company is not infringing or otherwise
violating any Intellectual Property rights of any third party, and, to the best
of such counsel's knowledge, no third party is infringing or otherwise violating
any of the Company's Intellectual Property in a way that would have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business, or business prospects of the Company.
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(14) Except as set forth in the Registration Statement, based
on all relevant information known to such counsel, none of the Company's
Intellectual Property is subject to a pending or threatened action by any
governmental agency that would materially and adversely affect the scope,
validity, or ownership of any Intellectual Property, except to the extent that
such action would not have a material adverse effect on the Company's ability to
market, manufacture, use, import, sell, or offer to sell the products described
in the Prospectus, whether existing or under development.
(15) The information in the Registration Statement and the
Prospectus under the caption "Business - Intellectual Property" has been
reviewed by such counsel and is a fair and accurate summary of such matters,
except such counsel has no involvement in and no knowledge of confidentiality
agreements, employee agreements to disclose and assign inventions, or intentions
to enter into licensing agreements.
(16) To such counsel's knowledge, there are no facts or
circumstances which would require the Company to obtain licenses under third
party Intellectual Property rights which are necessary to allow the Company to
conduct the business now being conducted or proposed to be conducted by the
Company as described in the Prospectus.
(17) Counsel is unaware of any asserted, unasserted, or
threatened claims relating to the scope, validity, or ownership of any of the
Intellectual Property.
References to the Registration Statement and the Prospectus in
this subsection (e) shall include any amendment or supplement thereto at the
date of such opinion.
(f) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of Vedder, Price, Kaufman & Kammholz, counsel for the Selling
Securityholder, dated the Closing Date, to the effect that:
(1) The Selling Securityholder has full corporate power to
enter into this Agreement, the Custody Agreement and the Power-of-Attorney and
to sell, transfer and deliver the Shares being sold by the Selling
Securityholder hereunder in the manner provided in this Agreement and to perform
its obligations under the Custody Agreement. The execution and delivery of this
Agreement, the Custody Agreement and the Power-of-Attorney have been duly
authorized by all necessary action (corporate or other) of the Selling
Securityholder. This Agreement, the Custody Agreement and the Power-of-Attorney
have been duly executed and delivered by the Selling Securityholder. Assuming
due authorization, execution and delivery by the Custodian, the Custody
Agreement and the Power-of-Attorney are the legal, valid, binding and
enforceable instruments of the Selling Securityholder, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally
and subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law);
(2) The delivery by the Selling Securityholder to the several
Underwriters of certificates for the Shares being sold hereunder by the Selling
Securityholder against payment therefor as provided herein, will convey good and
marketable title to such Shares to the several Underwriters, free and clear of
all security interests, liens, encumbrances, equities, claims or other
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defects, assuming that the purchasers do not have notice of an adverse claim and
purchase the Shares in good faith; and
(3) The sale of the Shares to the several Underwriters by the
Selling Securityholder pursuant to this Agreement, the compliance by the Selling
Securityholder with the other provisions of this Agreement, the Custody
Agreement and the consummation by the Selling Securityholder of the other
transactions herein contemplated do not, (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required under
state securities or blue sky laws, or (ii) conflict with or result in a breach
or violation of any of the terms and provisions of, or constitute a default
under any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Selling Securityholder is a party or by which such
Selling Securityholder or any of the Selling Securityholder's respective
properties are bound, and which is known to such counsel, or the charter
documents or by-laws of the Selling Securityholder, if applicable, or any
statute or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Selling
Securityholder and which is known to such counsel.
In rendering such opinion, such counsel may rely, as to matters of fact,
to the extent such counsel deems proper, on certificates of responsible officers
of the Company and public officials. Copies of such opinion shall be delivered
to the Representative and Underwriters' Counsel.
References to the Registration Statement and the Prospectus in this
subsection (f) shall include any amendment or supplement thereto at the date of
such opinion.
(g) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, an opinion
of Snell & Wilmer, L.L.P. in form and substance satisfactory to you, with
respect to the sufficiency of all such corporate proceedings and other legal
matters relating to this Agreement and the transactions contemplated hereby as
you may reasonably require, and the Company shall have furnished to such counsel
such documents as they may have requested for the purpose of enabling them to
pass upon such matters.
(h) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a letter or
letters from D&T, addressed to the Underwriters, dated the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be (in
each case, the "Bring Down Letter"), confirming that they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the applicable published Rules and Regulations and based upon the
procedures described in the letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), dated the
date hereof, or such later date on which Option Shares are to be purchased, as
the case may be, (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the Closing Date
or such later date on which Option Shares are to be purchased, as the case may
be, and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter that are necessary to reflect any
changes in the facts described in the Original Letter since its date, or to
reflect the availability of more recent financial statements, data or
information. The Bring Down Letter shall not disclose any change in the
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<PAGE> 32
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. The Original
Letter from D&T shall be addressed to or for the use of the Underwriters in form
and substance satisfactory to the Underwriters and shall (i) represent, to the
extent true, that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations, (ii) set forth their opinion with respect to their examination
of the consolidated balance sheets of the Company as of December 31, 1998
(including the balance sheets of Aztec Industries, Inc. as of January 31, 1998),
and related consolidated statements of operations and common stockholders'
equity (deficit) and cash flows for the twelve (12) months ended December 31,
1998, (iii) state that D&T has performed the procedures set out in Statement on
Auditing Standards No. 71 ("SAS 71") on the unaudited, interim financial
information for the periods ended March 31, 1999 and 1998 (the "Quarterly
Financial Statements"), (iv) state that , as a result of the foregoing
procedures, nothing came to their attention that leads them to believe that any
material modifications need to be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented, (v)
state that nothing came to their attention that caused them to believe that the
financial statements included in the Registration Statement and Prospectus do
not comply as to form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X , and (vi) address other matters
agreed upon by D&T and you. In addition, you shall have received from D&T a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's financial statements as of and for
the twelve (12) months ended December 31, 1998 did not disclose any weaknesses
in internal controls that they considered to be material weaknesses.
(i) At the time of the execution of this Agreement, the Underwriters
shall have received from M&P, former independent public accountants for the
Company, a letter dated such date and addressed to the Underwriters, in form and
substance satisfactory to the Underwriters, containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72 (or
any successor bulletin), with respect to the audited and unaudited financial
statements and certain financial and capital stock information contained in the
Registration Statement and the Prospectus.
(j) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(1) The representations and warranties of the Company in this
Agreement are true and correct in all material respects, as if made on and as of
the Closing Date and such later date on which Option Shares are to be purchased,
as the case may be, and the Company has complied
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<PAGE> 33
with all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later date on
which Option Shares are to be purchased, as the case may be;
(2) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(3) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations, and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the Registration
Statement, and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(4) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (a)
any material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company or any of its
Subsidiaries, (b) any transaction that is material to the Company or any of its
Subsidiaries, except transactions entered into in the ordinary course of
business or that were contemplated by and disclosed in the Registration
Statement and the Prospectus, (c) any obligation, direct or contingent, that is
material to the Company or any of its Subsidiaries, incurred by the Company or
any of its Subsidiaries, except obligations incurred in the ordinary course of
business, (d) any change in the capital stock or outstanding indebtedness of the
Company or any of its Subsidiaries that is material to the Company or such
Subsidiary or is out of the ordinary course of business of the Company or such
Subsidiary , (e) any dividend or distribution of any kind declared, paid or made
on the capital stock of the Company, or (f) any loss or damage (whether or not
insured) to the property of the Company or any of its Subsidiaries which has
been sustained or will have been sustained which has a Material Adverse Effect.
(k) The Representative shall have received a certificate from the
Selling Securityholder, signed by the Selling Securityholder, dated the Closing
Date and such later date on which Option Shares are to be purchased, as the case
may be, to the effect that:
(1) The representations and warranties of the Selling
Securityholder in this Agreement are true and correct in all material respects
as if made on and as of the Closing Date, or the date on which Option Shares are
to be purchased, as the case may be;
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(2) The Selling Securityholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior to the Closing
Date, or the date on which Option Shares are to be purchased, as the case may
be;
(3) To the extent that any statements or omissions are made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
information furnished to the Company by the Selling Securityholder, as amended
as of the Closing Date, the Registration Statement does not include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading, and the Prospectus, as amended or
supplemented as of the Closing Date, does not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and
(l) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each person set forth
on Schedule B attached hereto and each entity that is a stockholder and is
affiliated with an officer or director of the Company in writing prior to the
date hereof that such person will not, except as described below, during the
Lock-up Period, effect the Disposition of any Securities now owned or hereafter
acquired by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) on the transfer of shares
of Common Stock or Securities during such person's lifetime by bona fide gift or
upon death by will or intestacy, provided that any transferee agrees in writing
to be bound by the Lock-Up Agreement, and (ii) on the transfer or other
disposition of shares of Common Stock or Securities as a distribution to limited
partners or stockholders of such person, provided that the distributees thereof
agree in writing to be bound by the terms of the Lock-Up Agreement. The
foregoing restriction shall have been expressly agreed to preclude the holder of
the Securities from engaging in any hedging, pledge or other transaction which
is designed to or may reasonably be expected to lead to or result in a
Disposition of Securities during the Lock-Up Period, even if such Securities
would be disposed of by someone other than the such holder. Such prohibited
hedging, pledge or other transactions would include, without limitation, any
short sale (whether or not against the box), any pledge of shares covering an
obligation that matures or could reasonably mature during the Lock-Up Period, or
any purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Furthermore, such
person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction. In
addition, each officer and director of the Company, and each person listed on
Schedule 1 attached hereto (excluding Blackwater Capital Group, L.L.C.,
Blackwater Capital Partners, L.P. or their assigns) also has agreed pursuant to
the Lock-Up Agreement that the Representative shall have an irrevocable
preferential right for a period of two years from the termination of the Lock-Up
Period to purchase for its account or to sell for the account of each such
officer, director or securityholder any Securities of the Company that any of
such officers, directors, or stockholders may seek to sell under Rule 144
promulgated under the Act. Each such officer, director, or securityholder will
consult the Representative with regard to any such
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offering and will offer the Representative the opportunity to purchase or sell
any such Securities on terms not more favorable to such officer, director or
securityholder than they can secure elsewhere.
(m) The Representative's Warrant Agreement shall have been entered
into by the Company and you, and the Representative's Warrants shall have been
issued and sold to you pursuant thereto.
(n) The Company and the Selling Stockholder, if applicable, shall
have furnished to you such further certificates and documents as you shall
reasonably request (including certificates of officers of the Company) as to the
accuracy of the representations and warranties of the Company herein, as to the
performance by the Company of its obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are satisfactory to
Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
8. OPTION SHARES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company and the Selling Securityholder hereby grant to the several Underwriters,
for the purpose of covering over-allotments in connection with the distribution
and sale of the Firm Shares only, a nontransferable option to purchase up to an
aggregate of 450,000 Option Shares at the purchase price per share for the Firm
Shares set forth in Section 4 hereof (the "Option"). The Option may be exercised
by the Representative on behalf of the several Underwriters on one (1) or more
occasions in whole or in part during the period of forty five (45) days after
the date on which the Firm Shares are initially offered to the public by giving
written notice (the "Option Notice") to the Company and the Selling
Securityholder. The number of Option Shares to be purchased by each Underwriter
upon the exercise of the Option shall be the same proportion of the total number
of Option Shares to be purchased by the several Underwriters pursuant to the
exercise of the Option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representative in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the Option
granted by this Section 8 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in same day funds, payable to the order of the Company and the
Selling Securityholder or by wire transfer in same day funds. In the event of
any breach of the foregoing, the Company and the Selling Securityholder shall
reimburse the Underwriters for the interest lost and any other expenses borne by
them by reason of such breach. Such delivery and payment shall take place at the
offices of Snell & Wilmer L.L.P., Phoenix, Arizona, or at such other place as
may be agreed upon between the Representative and the Company (i) on the Closing
Date, if written
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notice of the exercise of the Option is received by the Company at
least two (2) full business days prior to the Closing Date, or (ii) on a date
which shall not be later than the third (3rd) full business day following the
date the Company receives written Notice of the Option, if such notice is
received by the Company after the date two (2) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location, as you may
reasonably request for checking at least one (1) full business day prior to the
date of payment and delivery and will be in such names and denominations as you
may request, such request to be made at least two (2) full business days prior
to such date of payment and delivery. If the Representative so elects, delivery
of the Option Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representative.
It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of the Option provided for in Section 8(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 7 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been furnished
with all such documents, certificates and opinions as you may request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company, or the satisfaction of any of the conditions herein contained.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter within the
meaning of the Act or the Exchange Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or such controlling
person may become subject (including, without limitation, in its capacity as an
Underwriter or as a "qualified independent underwriter" within the meaning of
Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities (or actions in respect thereof) arising out of or based upon (i)
any breach of any representation, warranty, agreement or covenant of the Company
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the
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Registration Statement or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, (iii) any
untrue statement or alleged untrue statement of any material fact contained in
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or
(iv) any untrue statement or alleged untrue statement of any material fact
contained in any audio or visual materials used in connection with the marketing
of the Shares and furnished by the Company, including without limitation,
slides, videos, films and tape recordings, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus or the Prospectus, or any such amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through the Representative, specifically for use in the
preparation thereof and, provided further, that the indemnity agreement provided
in this Section 9(a) with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 5(a)(4) hereof. This
indemnity agreement shall be in addition to any liabilities which the Company
may otherwise have.
(b) The Selling Securityholder agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act or the Exchange Act against any losses, claims, damages,
damages or liabilities, joint or several, to which such Underwriter or such
controlling person may become subject under the Act, the Exchange Act or
otherwise, arising out of or are based upon: (i) any breach of any
representation, warranty, agreement or covenant of the Selling Securityholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto or (B) any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto based upon information furnished by or on behalf of the
Selling Securityholder, or (iii) the omission or alleged omission to state in
the Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, a material fact
required to be stated therein or necessary to make the statements therein
relating to the Selling Securityholder not misleading, and agrees to reimburse
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling person in
connection with investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim,
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damage, liability or action; provided, however, that the Selling Securityholder
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omissions made in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any such Application
in reliance upon and in conformity with written information furnished to the
Company or to the Selling Securityholder by any Underwriter through the
Representative specifically for use therein and (ii) the Selling Securityholder
will not be liable to any Underwriter or any person controlling such Underwriter
with respect to any such untrue statement or omission made in any Preliminary
Prospectus that is corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting such loss, claim, damage or liability purchased
Shares from such Underwriter but was not sent or given a copy of the Prospectus
(as amended or supplemented) at or prior to the written confirmation or the sale
of such Shares to such person in any case where such delivery of the Prospectus
(as amended and supplemented) is required by the Act, unless such failure to
deliver the Prospectus (as amended and supplemented) was a result of
noncompliance by the Company with Section 5(a)(4) of this Agreement. This
indemnity agreement shall be in addition to any liability which the Selling
Securityholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company and the Selling Stockholder against any losses,
claims, damages or liabilities, joint or several, to which the Company and the
Selling Stockholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 9(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company or to the Selling Securityholder by such
Underwriter, directly or through the Representative, specifically for use in the
preparation thereof, and agrees to reimburse the Company and the Selling
Securityholder for any legal or other expenses reasonably incurred by the
Company or by the Selling Securityholder in connection with investigating or
defending any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 9(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, and each person, if any, who controls the Company within the meaning of
the Act or the Exchange Act. This indemnity agreement shall be in addition to
any liabilities which such Underwriter may otherwise have.
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(d) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 9, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 9 except to the extent that it has been
prejudiced by such omission. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying party
to such indemnified party of the indemnifying party's election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 9 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 9(a),
9(b), or 9(c) hereof who are parties to such action), (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnification could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on all claims that are the subject
matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 9
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally
39
<PAGE> 40
and not jointly are responsible pro rata for the portion represented by the
percentage that the underwriting discount bears to the public offering price,
and the Company and the Selling Securityholder are responsible for the remaining
portion, provided, however, that (i) no Underwriter shall be required to
contribute any amount in excess of the amount by which the underwriting discount
applicable to the Shares purchased by such Underwriter exceeds the amount of
damages which such Underwriter has otherwise been required to pay and (ii) 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. The contribution agreement in this
Section 9(e) shall extend upon the same terms and conditions to, and shall inure
to the benefit of, each person, if any, who controls any Underwriter, or the
Company, or the Selling Securityholder within the meaning of the Act or the
Exchange Act and each officer of the Company who signed the Registration
Statement and each director of the Company.
(f) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 9, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
(g) The liability of the Selling Securityholder under this Section 9
shall not exceed an amount equal to the total proceeds received by the Selling
Securityholder from the sale of the Option Shares.
10. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company, the Selling Securityholder and the Underwriters herein or in
certificates delivered pursuant hereto, and the indemnity and contribution
agreements contained in Section 9 hereof shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter within the meaning of the
Act or the Exchange Act, or by or on behalf of the Company, or any of its
officers, directors or controlling persons within the meaning of the Act or the
Exchange Act, and shall survive the delivery of the Shares to the several
Underwriters hereunder or termination of this Agreement.
11. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall
fail to take up and pay for the number of Firm Shares agreed by such Underwriter
or Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof, and if the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for
40
<PAGE> 41
exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right,
but shall not be obligated, to take up and pay for (in such proportions as may
be agreed upon among them) the Firm Shares which the defaulting Underwriter or
Underwriters so agreed but failed to purchase. If such remaining Underwriters do
not, at the Closing Date, take up and pay for the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase, the
Closing Date shall be postponed for twenty-four (24) hours to allow the several
Underwriters the privilege of substituting within twenty-four (24) hours
(including non-business hours) another underwriter or underwriters (which may
include any nondefaulting Underwriter) satisfactory to the Company. If no such
underwriter or underwriters shall have been substituted as aforesaid by such
postponed Closing Date, the Closing Date may, at the option of the Company, be
postponed for a further twenty-four (24) hours, if necessary, to allow the
Company the privilege of finding another underwriter or underwriters,
satisfactory to you, to purchase the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 11, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 11, then the Company shall not be liable to
any Underwriter (except as provided in Sections 6 and 9 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 6 and 9 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 11.
12. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., Pacific Standard time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the public offering shall mean the time
of the release by you, for publication, of the first newspaper advertisement
relating to the Shares, or the
41
<PAGE> 42
time at which the Shares are first generally offered by the Underwriters to the
public by letter, telephone or telecopy, whichever shall first occur. By giving
notice as set forth in Section 13 before the time this Agreement becomes
effective, you, as Representative of the several Underwriters, or the Company,
may prevent this Agreement from becoming effective without liability of any
party to any other party, except as provided in Sections 5(a)(9), 6 and 9
hereof.
(b) You, as Representative of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
shall have failed, refused or been unable to perform any agreement on its part
to be performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled is not fulfilled, including, without
limitation, any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse, or (ii) if additional governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
judgment makes it inadvisable or impracticable to proceed with the offering,
sale and delivery of the Shares, or (v) if there shall have been an outbreak or
escalation of hostilities or of any other insurrection or armed conflict or the
declaration by the United States of a national emergency which, in the opinion
of the Representative, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 5(a)9, 6 and 9 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
6 and 9 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 12, you shall promptly
notify the Company by telephone or telecopy , in each case confirmed by letter.
If the Company shall elect to prevent this Agreement from becoming effective,
the Company shall promptly notify you by telephone or telecopy , in each case
confirmed by letter.
13. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, or telecopied (and confirmed by letter) to you, c/o
Cruttenden Roth Incorporated, 24 Corporate Plaza, San Diego, California 92660,
telecopier number (714) 852-9603, Attention: General Counsel, with a copy to
42
<PAGE> 43
Snell & Wilmer, LLP, One Arizona Center, Phoenix, Arizona 85004, telecopier
number (602) 382- 6070, Attention: Steven D. Pidgeon, Esq.; if sent to the
Company, such notice shall be mailed, delivered or telecopied (and confirmed by
letter) to DuraSwitch Industries, Inc., 234 S. Extension Road, Suite 103, Mesa,
Arizona 85210, telecopier number (480) 844-1199, Attention: Chief Executive
Officer, with a copy to Quarles & Brady LLP, One E. Camelback Road, Suite 400,
Phoenix, Arizona 85012, telecopier number (602) 230-5598, Attention: P. Robert
Moya, Esq; if sent to the Selling Securityholder, such notice shall be mailed,
delivered (and confirmed by letter) or telecopied (and confirmed by letter) to
Blackwater Capital Partners, L.P., 1800 Glenview Road, Glenview, IL 60025
Attention: Steven R. Green, telecopier number (847) 729-2296, with a copy to
Vedder, Price, Kaufman & Kammholz, 222 N. La Salle Street, Chicago, IL 60601,
telecopier number (312) 609-5005, Attention: John T. McEnroe, Esq.
14. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and their respective executors,
administrators, successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or entity, other
than the parties hereto and their respective executors, administrators,
successors and assigns, and the controlling persons within the meaning of the
Act or the Exchange Act, officers and directors referred to in Section 9 hereof,
any legal or equitable right, remedy or claim in respect of this Agreement or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or entity. No purchaser of any
of the Shares from any Underwriter shall be construed a successor or assign by
reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be entitled
to act and rely upon any statement, request, notice or agreement made or given
by you jointly or by Cruttenden Roth Incorporated on behalf of you.
15. APPLICABLE LAW. The validity and interpretation of this Agreement, and
the terms and conditions set forth herein, shall be governed by, and construed
in accordance with, the laws of the State of California.
16. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. All judicial
proceedings arising out of or relating to this Agreement shall be initiated and
tried exclusively in the state and federal courts located in the State of
California. The aforementioned choice of venue is intended by the parties to be
mandatory and not permissive in nature, thereby precluding the possibility of
litigation between the parties with respect to or arising out of this Agreement
in any jurisdiction other than that specified in this Section 16. The Company
and the Selling Securityholder accepts for itself and in connection with its
properties, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts and waives any defense of forum non conveniens and irrevocably
agrees to be bound by any judgment rendered thereby in connection with this
Agreement. Each party hereby authorizes and accepts service of process
sufficient for personal jurisdiction in any action against
43
<PAGE> 44
it as contemplated by this Section 16 by registered or certified mail, return
receipt requested, postage prepaid, to its address for the giving of notices as
set forth in this Agreement.
17. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 45
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement between the Company and the several Underwriters.
Very truly yours,
DURASWITCH INDUSTRIES, INC.
By: ____________________________________
R. Terren Dunlap
Chief Executive Officer
BLACKWATER CAPITAL PARTNERS, L.P.
By:_____________________________________
Its:_________________________________
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
On its behalf and on behalf of each of the several
Underwriters named in Schedule A hereto.
By: CRUTTENDEN ROTH INCORPORATED
By: ___________________________________
Authorized Signatory
For and on behalf of the Representative
45
<PAGE> 46
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters To Be Purchased
------------ ---------------
<S> <C>
Cruttenden Roth Incorporated...............
TOTAL..........................
</TABLE>
1
<PAGE> 1
Exhibit 10.8
Draft 8/6/99
DURASWITCH INDUSTRIES, INC.
COMMON STOCK WARRANT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT.
This certifies that, for good and valuable consideration, receipt of
which is hereby acknowledged, __________________ ("Holder") is entitled to
purchase, subject to the terms and conditions of this Warrant, from DuraSwitch
Industries, Inc., a Nevada corporation (the "Company"), fully paid and
nonassessable shares of the Company's Common Stock, .001 par value per share
("Common Stock") of the Company, in accordance with Section 2 during the period
commencing on August ___, 2000 [one year from the date of the Prospectus] and
ending at 5:00 p.m. California time, August ___, 2004 (the "Expiration Date"),
at which time this Warrant will expire and become void unless earlier terminated
as provided herein. The shares of Common Stock of the Company for which this
Warrant is exercisable, as adjusted from time to time pursuant to the terms
hereof, are hereinafter referred to as the "Shares."
1. Exercise Price. The initial purchase price for the Shares shall be
$_________ per share [165% of the price to the public]. Such price shall be
subject to adjustment pursuant to the terms hereof (such price, as adjusted from
time to time, is hereinafter referred to as the "Exercise Price").
2. Exercise and Payment.
(a) Cash Exercise. At any time after August ___, 2000, this
Warrant may be exercised, in whole or in part, from time to time by the Holder,
during the term hereof, by surrender of this Warrant and the Notice of Exercise
annexed hereto duly completed and executed by the Holder to the Company at the
principal executive offices of the Company, together with payment in the amount
obtained by multiplying the Exercise Price then in effect by the number of
Shares thereby purchased, as designated in the Notice of Exercise. Payment may
be in cash or by check payable to the order of the Company.
(b) Net Issuance. In lieu of payment of the Exercise Price
described in Section 2(a), the Holder may elect to receive, without the payment
by the Holder of any additional consideration, shares equal to the value of this
Warrant or any portion hereof by the surrender of this Warrant or such portion
to the Company, with the net issue election notice annexed hereto (the "Net
Issuance Election") duly executed, at the principal executive offices of the
Company. Thereupon, the Company shall issue to the Holder such number of fully
paid and nonassessable Shares as is computed using the following formula:
<PAGE> 2
where: X = Y (A-B)
-------
A
X = the number of Shares to be issued to the Holder pursuant
to this Section 2.
Y = the number of Shares covered by this Warrant in respect of
which the net issuance election is made pursuant to this
Section 2.
A = the fair market value of one share of Common Stock, as
determined in accordance with the provisions of this Section
2.
B = the Exercise Price in effect under this Warrant at the
time the net issuance election is made pursuant to this
Section 2.
For purposes of this Section 2, the "fair market value" per share of the Common
Stock shall mean:
(i) If the Common Stock is traded on a national
securities exchange or admitted to unlisted trading privileges on such an
exchange, or is listed on the National Market of the National Association of
Securities Dealers Automated Quotations System (the "Nasdaq National Market") or
other over-the-counter quotation system, the fair market value shall be the last
reported sale price of the Common Stock on such exchange or on the Nasdaq
National Market on the last business day before the effective date of exercise
of the Net Issuance Election or if no such sale is made on such day, the mean of
the closing bid and asked prices such day on such exchange, the Nasdaq National
Market or over-the-counter quotation system; and
(ii) If the Common Stock is not so listed or admitted
to unlisted trading privileges and bid and ask prices are not reported, the fair
market value shall be the price per share which the Company could obtain from a
willing buyer for shares sold by the Company for authorized but unissued shares,
as such price shall be determined by mutual agreement of the Company and the
Holder of this Warrant.
3. Reservation of Shares. The Company hereby agrees that at all times
there shall be reserved for issuance and delivery upon exercise of this Warrant
such number of shares of Common Stock or other shares of capital stock of the
Company from time to time issuable upon exercise of this Warrant. All such
shares shall be duly authorized, and when issued upon such exercise, shall be
validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale and
free and clear of all preemptive rights.
4. Delivery of Stock Certificates. Within a reasonable time after
exercise, in whole or in part, of this Warrant, the Company shall issue in the
name of and deliver to the Holder a certificate
or certificates for the number of fully paid and nonassessable shares of Common
Stock which the Holder shall have requested in the Notice of Exercise or Net
Issuance Election, as applicable. If this Warrant is exercised in part, the
Company shall deliver to the Holder a new Warrant for the unexercised portion of
this Warrant at the time of delivery of such stock certificate or certificates.
2
<PAGE> 3
5. No Fractional Shares. No fractional shares or scrip representing
fractional shares will be issued upon exercise of this Warrant. If upon any
exercise of this Warrant a fraction of a share results, the Company will pay the
Holder the difference between the cash value of the fractional share and the
portion of the Exercise Price allocable to the fractional share.
6. Listing. Prior to the issuance of any shares of Common Stock upon
exercise of this Warrant, the Company shall secure the listing of such shares of
Common Stock upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance upon exercise of this Warrant) and shall maintain,
so long as any other shares of Common Stock shall be so listed, such listing of
all shares of Common Stock from time to time issuable upon the exercise of this
Warrant; and the Company shall so list on each national securities exchange or
automated quotation system, and shall maintain such listing of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange or automated quotation system.
7. Charges, Taxes and Expenses. The Company shall pay all transfer
taxes or other incidental charges, if any, in connection with the transfer of
the Shares purchased pursuant to the exercise hereof from the Company to the
Holder.
8. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant.
9. Saturdays, Sundays, Holidays, Etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding
weekday that is not a legal holiday.
10. Adjustment of Exercise Price and Number of Shares. The Exercise
Price and the number of and kind of securities purchasable upon exercise of this
Warrant shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances. If the
Company shall at any time after the date hereof but prior to the expiration of
this Warrant subdivide its outstanding securities as to which purchase rights
under this Warrant exist, by split-up or otherwise, or combine
its outstanding securities as to which purchase rights under this Warrant exist,
the number of Shares as to which this Warrant is exercisable as of the date of
such subdivision, split-up or combination will be proportionately increased in
the case of a subdivision, or proportionately decreased in the case of a
combination. Appropriate adjustments also will be made to the Exercise Price,
but the aggregate purchase price payable for the total number of Shares
purchasable under this Warrant as of such date shall remain the same.
3
<PAGE> 4
(b) Stock Dividend. If at any time after the date hereof the
Company declares a dividend or other distribution on Common Stock payable in
Common Stock or other securities or rights convertible into Common Stock
("Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon exercise or
conversion thereof), then the number of Shares of Common Stock for which this
Warrant may be exercised shall be increased as of the record date (or the date
of such dividend distribution if no record date is set) for determining which
holders of Common Stock shall be entitled to receive such dividend, in
proportion to the increase in the number of outstanding shares (and shares of
Common Stock issuable upon conversion of all such securities convertible into
Common Stock) of Common Stock as a result of such dividend, and the Exercise
Price shall be adjusted so that the aggregate amount payable for the purchase of
all the Shares issuable hereunder immediately after the record date (or on the
date of such distribution, if applicable) for such dividend will equal the
aggregate amount so payable immediately before such record date (or on the date
of such distribution, if applicable).
(c) Other Distributions. If at any time after the date hereof
the Company distributes to holders of its Common Stock, other than as part of
its dissolution or liquidation or the winding up of its affairs, any shares of
its capital stock, any evidence of indebtedness or any of its assets (other than
cash, Common Stock or Common Stock Equivalents), then the Company may, at its
option, either (i) decrease the Exercise Price of this Warrant by an appropriate
amount based upon the value distributed on each share of Common Stock as
determined in good faith by the Company's Board of Directors or (ii) provide by
resolution of the Company's Board of Directors that on exercise of this Warrant,
the Holder hereof shall thereafter be entitled to receive, in addition to the
Shares of Common Stock otherwise receivable on exercise hereof, the number of
shares or other securities or property which would have been received had this
Warrant at the time been exercised.
(d) Merger. If at any time after the date hereof there shall
be a merger or consolidation of the Company with or into another corporation
when the Company is not the surviving corporation, then the Holder shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the aggregate Exercise Price then in
effect, the number of shares or other securities or property of the successor
corporation resulting from such merger or consolidation, which would have been
received by Holder for the Shares subject to this Warrant had this Warrant been
exercised at such time.
(e) Reclassification, Etc. If at any time after the date
hereof there shall be a change or reclassification of the securities as to which
purchase rights under this Warrant exist into the same or a different number of
securities of any other class or classes, then the Holder shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
herein and upon payment of the Exercise Price then in effect, the number of
shares or other securities or property resulting from such change or
reclassification, which would have been received by Holder for the Shares
subject to this Warrant had this Warrant been exercised at such time.
11. Notice of Adjustments; Notices. Whenever the Exercise Price or
number of Shares purchasable hereunder is adjusted pursuant to Section 10
hereof, the Company must execute and deliver to the Holder a certificate setting
forth, in reasonable detail, the event requiring the
4
<PAGE> 5
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated and the Exercise Price and number of and kind of securities
purchasable hereunder after giving effect to such adjustment, and must cause a
copy of such certificate to be mailed (by first class mail, postage prepaid) to
the Holder.
12. Rights As Stockholder; Notice to Holders. Nothing contained in this
Warrant will be construed as conferring upon the Holder or his or its permitted
transferees the right to vote or to receive dividends or to consent or to
receive notice as a shareholder in respect of any meeting of shareholders for
the election of directors of the Company or of any other matter, or any rights
whatsoever as shareholders of the Company. The Company will notify the
Warrantholder by registered mail if at any time prior to the expiration or
exercise in full of the Warrant, any of the following events occur:
(a) a dissolution, liquidation or winding up of the Company
shall be proposed;
(b) a capital reorganization or reclassification of the Common
Stock (other than a subdivision or combination of the outstanding Common Stock
and other than a change in the par value of the Common Stock) or any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and that does not result in any reclassification or change of Common
Stock outstanding) or in the case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety; or
(c) a taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other rights.
Such giving of notice will be simultaneous with the giving of
notice to holders of Common Stock. Such notice must specify the record date or
the date of closing the stock transfer books, as the case may be. Failure to
provide such notice will not affect the validity of any action taken in
connection with such dividend, distribution or subscription rights, or proposed
merger, consolidation, sale, conveyance, dissolution, liquidation or winding up.
13. Restricted Securities. The Holder understands that this Warrant and
the Shares purchasable hereunder constitute "restricted securities" under the
federal securities laws inasmuch as they are, or will be, acquired from the
Company in transactions not involving a public offering and accordingly may not,
under such laws and applicable regulations, be resold or transferred without
registration under the Securities Act of 1933, as amended (the "1933 Act") or an
applicable exemption from such registration. Unless the Shares are subsequently
registered pursuant to Section 16 of this Warrant, the Holder further
acknowledges that the securities legend on Exhibit A to the Notice of Exercise
attached hereto shall be placed on any Shares issued to the Holder upon exercise
of this Warrant.
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14. Certification of Investment Purpose. Unless a current registration
statement under the 1933 Act shall be in effect with respect to the securities
to be issued upon exercise of this Warrant, the Holder covenants and agrees
that, at the time of exercise hereof, it will deliver to the Company a written
certification executed by the Holder that the securities acquired by him upon
exercise hereof are for the account of such Holder and acquired for investment
purposes only and that such securities are not acquired with a view to, or for
sale in connection with, any distribution thereof.
15. Disposition of Shares; Transferability.
(a) Holder hereby agrees not to make any disposition of any
Shares purchased hereunder unless and until:
(i) Holder shall have notified the Company of the
proposed disposition and provided a written summary of the terms and conditions
of the proposed disposition; and
(ii) Holder shall have complied with all requirements
of this Warrant applicable to the disposition of the Shares.
The Company shall not be required (i) to transfer on
its books any Shares which have been sold or transferred in violation of the
provisions of this Section 15 or (ii) to treat as the owner of the Shares, or
otherwise to accord voting or dividend rights to, any transferee to whom the
Shares have been transferred in contravention of the terms of this Warrant.
(b) Transfer. This Warrant shall be transferable only on the
books of the Company maintained at its principal office in Tempe, Arizona or
wherever its principal office may then be located, upon delivery thereof duly
endorsed by the Holder or by its duly authorized attorney or representative,
accompanied by proper evidence of succession, assignment or authority to
transfer. Upon any registration of transfer, the Company shall execute and
deliver new Warrants to the person entitled thereto.
(c) Limitations on Transfer. This Warrant may not be sold,
transferred, assigned or hypothecated (any such action, a "Transfer") by the
Holder except to (i) one or more persons, each of whom on the date of transfer
is an officer of the Holder; (ii) a general partnership or general partnerships,
the general partners of which are the Holder and one or more persons, each of
whom on the date of transfer is an officer of the Holder; (iii) a successor to
the Holder in any merger or consolidation; (iv) a purchaser of all or
substantially all of the Holder's assets; (v) any person receiving this Warrant
from one or more of the persons listed in this Section 15(c) at such person's
death pursuant to will, trust or the laws of intestate succession, or (vi) after
one year from the date of this Warrant, any person receiving the Warrant from
the persons listed in this Section 15. This Warrant may be divided or combined,
upon request to the Company by the Holder, into a certificate or certificates
representing the right to purchase the same aggregate number of Shares. If at
the time of a Transfer, a Registration Statement is not in effect to register
this Warrant, the Company may require the Holder to make such representations,
and may place such legends on certificates
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representing this Warrant, as may be reasonably required in the opinion of
counsel to the Company to permit a Transfer without such registration.
16. Registration Rights.
(a) Piggyback Registration. If at any time during the
four-year period commencing August ___, 2000 and ending on August ___, 2004, the
Company determines to register for its own account or the account of others
under the 1933 Act any of its equity securities, other than on Form S-4 or Form
S-8 or their then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business, or equity
securities issuable in connection with stock option or other employee benefit
plans, the Company shall send to each Holder of Warrants or Shares written
notice of such determination and, if within twenty (20) days after receipt of
such notice, such Holder shall so request in writing (hereafter a "Selling
Holder"), the Company shall include in such Registration Statement all or any
part of the Shares issuable or issued upon exercise of the Warrants (the
"Registrable Securities") such Selling Holder requests to be registered. The
obligations of the Company under this Section 16(a) may be waived by Holders
holding a majority in interest of the Registrable Securities. In the event that
the managing underwriter for said offering advises the Company in writing that
the inclusion of such securities in the offering would be materially detrimental
to the offering, such securities shall nevertheless be included in the
Registration Statement, provided that the Holder and each holder of Shares
desiring to have their Shares included in the Registration Statement agree in
writing, for a period of 90 days following such offering, not to sell or
otherwise dispose of such Shares pursuant to such Registration Statement, which
Registration Statement the Company shall keep effective for a period of at least
nine months following the expiration of such 90-day period.
(b) Demand Registration. In addition to any Registration
Statement pursuant to subparagraph (a) above, during the four-year period
beginning on August __, 2000 and ending on August ___, 2004, the Company will,
as promptly as practicable (but in any event within sixty (60) days), after
written request (the "Request") by the Holder, or by a person or persons holding
(or having the right to acquire by virtue of holding the Warrants) at least 25%
of the Registrable Securities (such Holder or Holders to be included in the
definition of "Selling Holder" for the purposes of Section 16(c) hereof),
prepare and file at its own expense a Registration Statement with the Commission
and appropriate "blue sky" authorities sufficient to permit the public offering
of the Registrable Securities and will use its best efforts at its own expense
through its officers, directors, auditors and counsel, in all matters necessary
or advisable, to cause such Registration Statement to become effective as
promptly as practicable and to maintain such effectiveness so as to permit
resale of the Shares covered by the Request until the earlier of the time that
all such Shares have been sold or the expiration of 90 days from the effective
date of the Registration Statement, provided, however, that the Company shall
only be obligated to file one such Registration Statement under this Section
16(b).
(c) Obligations of the Holders. In connection with the
registration of the Registrable Securities pursuant to either Sections 16(a) or
(b), the Selling Holders shall have the following obligations:
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<PAGE> 8
(i) It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to each Selling Holder that such Selling Holder shall furnish to the
Company such information regarding itself, the Registrable Securities held by it
and the intended method of disposition of the Registrable Securities held by it
as shall be reasonably required to effect the registration of the Registrable
Securities and shall execute such documents in connection with such registration
as the Company may reasonably request. At least fifteen (15) days prior to the
first anticipated filing date of the Registration Statement, the Company shall
notify each Selling Holder of the information the Company requires from each
such Selling Holder (the "Requested Information") in the case of a Registration
Statement being prepared pursuant to Section 16(b) or if such Selling Holder
elects to have any of such Selling Holder's Registrable Securities included in
the Registration Statement in the case of a Registration Statement being
prepared pursuant to Section 16(a).
(ii) Each Selling Holder by such Selling Holder's
acceptance of the Registrable Securities agrees to cooperate with the Company as
reasonably requested by the Company in connection with the preparation and
filing of the Registration Statement hereunder, unless such Selling Holder has
notified the Company in writing of such Selling Holder's election to exclude all
of such Selling Holder's Registrable Securities from the Registration Statement;
and
(iii) No Selling Holder may participate in any
underwritten registration hereunder unless such Selling Holder (i) agrees to
sell such Selling Holder's Registrable Securities on the basis provided in any
underwriting arrangements approved by the Selling Holders entitled hereunder to
approve such arrangements, (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements, and (iii)
agrees to pay its pro rata share of all underwriting discounts and commissions
and other fees and expenses of investment bankers and any manager or managers of
such underwriting, except as provided in Section 16(d) below.
(d) Obligations of the Company. If and whenever the Company is
required to use its best efforts to take action pursuant to any Federal or state
law or regulation to permit the sale or other disposition of any Shares
purchasable upon exercise of this Warrant that are then held or that may be
acquired upon exercise of the Warrants in order to effect or cause the
registration of any Registrable Securities under the Securities Act as provided
in this Section 16, the Company shall, as expeditiously as practicable:
(i) Prepare and file with the SEC, as soon as
practicable within ninety (90) days after the end of the period within which
requests for registration may be given to the company a Registration Statement
or Registration Statements relating to the registration on any appropriate form
under the Securities Act, which form shall be available for the sale of the
Registrable Securities in accordance with the intended method or methods of
distribution thereof, and use its best efforts to cause such Registration
Statements to become effective; provided that before filing a Registration
Statement or Prospectus or any amendment or supplements thereto, including
documents incorporated by reference after the initial filing of any Registration
Statement, the Company will furnish to the Holders of the Registrable Securities
covered by such Registration
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<PAGE> 9
Statement and the underwriters, if any, copies of all such documents provided to
be filed, which documents will be subject to the review of such Holders and
underwriters;
(ii) prepare and file with the SEC such amendments
and post-effective amendments to a Registration Statement as may be necessary to
keep such Registration Statement effective for a reasonable period not to exceed
45 days; cause the related Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act; and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such Registration Statement or
supplement to such Prospectus;
(iii) notify the selling Holders of Registrable
Securities and the managing underwriters, if any, promptly, and (if requested by
any such Person) confirm such advice in writing, (A) when a Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and, with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective; (B) of any request by the SEC for amendments or
supplements to a Registration Statement or related Prospectus or for additional
information; (C) of the issuance by the SEC of any stop order suspending the
effectiveness of a Registration Statement or the initiation of any proceedings
for that purpose; (D) if at any time the representations and warranties of the
Company contemplated by paragraph (xiv) below ceases to be true and correct in
all material respects; (E) of the receipt by the Company of any notification
with respect to the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; and (F) of the happening of any event that makes
any statement of a material fact made in the Registration Statement, the
Prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement or Prospectus
so that they 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;
(iv) make every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of a Registration Statement
at the earliest possible moment;
(v) if reasonably requested by the managing
underwriters, immediately incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriters believe
(on advice of counsel) should be included therein as required by applicable law
relating to such sale of Registrable Securities, including, without limitation,
information with respect to the purchase price being paid for the Registrable
Securities by such underwriters and with respect to any other terms of the
underwritten (or "best-efforts" underwritten) offering; and make all required
filings of such Prospectus supplement or post-effective amendment as soon as
notified of the matters to be incorporated in such Prospectus supplement or
post-effective amendment;
(vi) furnish to each selling Holder of Registrable
Securities and each managing underwriter, without charge, at least one signed
copy of the Registration Statement and
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<PAGE> 10
any post-effective amendment thereto, including financial statements and
schedules, all documents incorporated therein by reference and all exhibits
(including those incorporated by reference);
(vii) deliver to each selling Holder of Registrable
Securities and the underwriters, if any, without charge, as many copies of the
Prospectus or Prospectuses (including each preliminary Prospectus) any amendment
or supplement thereto as such Persons may reasonably request; the Company
consents to the use of such Prospectus or any amendment or supplement thereto by
each of the selling Holders of Registrable Securities and the underwriters, if
any, in connection with the offering and sale of the Registrable Securities
covered by such Prospectus or any Amendment or supplement thereto;
(viii) prior to any public offering of Registrable
Securities, cooperate with the selling Holders of Registrable Securities, the
underwriters, if any, and their respective counsel in connection with the
registration or qualification of such Registrable Securities for offer and sale
under the securities or Blue Sky laws of such jurisdictions within the United
States as any selling Holder or underwriter reasonably requests in writing, keep
each such registration or qualification effective during the period such
Registration Statement is required to be kept effective and do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the applicable
Registration Statement; provided that the Company will not be required to
qualify to do business in any jurisdiction where it is not then so qualified or
to take any action which would subject the Company to general service of process
in any jurisdiction where it is not at the time so subject;
(ix) cooperate with the selling Holders of
Registrable Securities and the managing underwriters, if any, to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends; and enable such
Registrable Securities to be in such denominations and registered in such names
as the managing underwriters may request at least two Business Days prior to any
sale of Registrable Securities to the underwriters;
(x) use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities within the
United States as may be necessary to enable the seller or sellers thereof or the
underwriters, if any, to consummate the disposition of such Registrable
Securities;
(xi) upon the occurrence of any event contemplated by
Section 16(d)(iii)(F) above, prepare a supplement or post-effective amendment to
the applicable Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(xii) with respect to each issue or class of
Registrable Securities, use its best efforts to cause all Registrable Securities
covered by the Registration Statements to be listed on
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each securities exchange, if any, on which similar securities issued by the
Company are then listed if requested by the Holders of a majority of such issue
or class of Registrable Securities;
(xiii) enter into such agreements (including an
underwriting agreement) and take all such other action reasonably required in
connection therewith in order to expedite or facilitate the disposition of such
Registrable Securities and in such connection, if the registration is in
connection with an underwritten offering (A) make such representations and
warranties to the underwriters, in such form, substance and scope as are
customarily made by issuers to underwriters in underwritten offering and confirm
the same if and when requested; (B) obtain opinions of counsel to the Company
and updates thereof (which counsel and opinions in form, scope and substance
shall be reasonably satisfactory to the underwriters) addressed to the
underwriters covering the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably requested by
such underwriters; (C) obtain "cold comfort" letters and updates thereof from
the Company's accountants addressed to the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters by underwriters in connection with underwritten offerings; (D)
set forth in full in any underwriting agreement entered into the indemnification
provisions and procedures of Section 16(f) hereof with respect to all parties to
be indemnified pursuant to said Section; and e. deliver such documents and
certificates as may be reasonably requested by the underwriters to evidence
compliance with clause (i) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the Company; the
above shall be done at each closing under such underwriting or similar agreement
or as and to the extent required hereunder;
(xiv) make available for inspection by one or more
representatives of the Holders of Registrable Securities being sold, any
underwriter participating in any disposition pursuant to such registration, and
any attorney or accountant retained by such Holders or underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such representatives, in connection with
such; and
(xv) otherwise use its best efforts to comply with
all applicable Federal and state regulations; and take such other action as may
be reasonably necessary to or advisable to enable each such Holder and each such
underwriter to consummate the sale or disposition in such jurisdiction or
jurisdiction in which any such Holder or underwriter shall have requested that
the Registrable Securities be sold.
Except as otherwise provided in this Agreement, the Company shall have sole
control in connection with the preparation, filing, withdrawal, amendment or
supplementing of each Registration Statement, the selection of underwriters, and
the distribution of any preliminary prospectus included in the Registration
Statement, and may include within the coverage thereof additional shares of
Common Stock or other securities for its own account or for the account of one
or more of its other security holders.
The Company may require each Seller of Registrable Securities as to
which any registration is being effected to furnish to the Company such
information regarding the distribution of such
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<PAGE> 12
securities and such other information as may otherwise be required by the
Securities Act to be included in such Registration Statement.
(e) Expenses of Registration. All expenses, other than
underwriting discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 16(a) or 16(b),
including, without limitation, all registration, listing and qualifications
fees, printers and accounting fees and the fees and disbursements of counsel for
the Company and the Selling Holders, shall be borne by the Company; provided,
however, that the Company shall only be required to bear the fees and
out-of-pocket expenses of one legal counsel selected by the Selling Holders in
connection with such registration.
(f) Indemnification. In the event any Registrable Securities
are included in a Registration Statement under this Agreement:
(i) To the extent permitted by law, the Company will
indemnify and hold harmless each Selling Holder who holds such Registrable
Securities, the directors, if any, of such Selling Holder, the officers, if any,
of such Selling Holder, each person, if any, who controls any Selling Holder
within the meaning of the 1933 Act, any underwriter (as defined in the 1933 Act)
for the Selling Holders, the directors, if any, of such underwriter and the
officers, if any, of such underwriter, and each person, if any, who controls any
such underwriter within the meaning of the 1933 Act (each, an "Indemnified
Person"), against any losses, claims, damages, expenses or liabilities (joint or
several) (collectively, "Claims") to which any of them may become subject under
the 1933 Act or otherwise, insofar as such Claims (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement when it first became effective, or any
related final prospectus, amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which the statements therein were made, not misleading (a "Violation"). The
Company shall reimburse the Selling Holders and each such underwriter or
controlling person, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 16(f)(i) shall not apply in such case to the extent
any such Claim arising out of or based upon a Violation which occurs in reliance
upon and in conformity with information furnished in writing to the Company by
any Indemnified Person or underwriter for such Indemnified Person expressly for
use in connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, and shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld.
(ii) In connection with any Registration Statement in
which a Selling Holder is participating, each such Selling Holder agrees to
indemnify and hold harmless, to the same extent and in the same manner set forth
in Section 16(f)(i), the Company, each of its directors, each of its officers
who signs the Registration Statement, each person, if any, who controls the
Company
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within the meaning of the 1933 Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such stockholder or underwriter
within the meaning of the 1933 Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against any Claim to which any of
them may become subject, under the 1933 Act or otherwise, insofar as such Claim
arises out of or is based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Selling
Holder expressly for use in connection with such Registration Statement, and
such Selling Holder will reimburse any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such Claim;
provided, however, that the indemnity agreement contained in this Section
16(f)(ii) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Selling Holder,
which consent shall not be unreasonably withheld.
(iii) The Company shall be entitled to receive
indemnities from underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in any distribution to the same
extent as provided above, with respect to information furnished in writing by
such persons expressly for inclusion in the Registration Statement.
(iv) Promptly after receipt by an Indemnified Person
or Indemnified Party under this Section 16(f) of notice of the commencement of
any action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is made against any
indemnifying party under this Section 16(f), deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying parties; provided, however, that an Indemnified Person or
Indemnified Party shall have the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party, if, in the reasonable opinion
of counsel retained by the indemnifying party, the representation by such
counsel of the Indemnified Person or Indemnified Party and the indemnifying
party would be inappropriate due to actual or potential differing interests
between such Indemnified Person or Indemnified Party and any other party
represented by such counsel in such proceeding. The Indemnifying Party shall pay
for only one separate legal counsel for the Indemnified Parties; such legal
counsel shall be selected by the Indemnified Parties holding a majority in
interest of the Registrable Securities. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 16(f), except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action. The indemnification required by this Section 16(f) shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as such expense, loss, damage or liability is incurred and is due
and payable.
(v) Notwithstanding any of the foregoing, if, in
connection with an underwritten public offering of Registrable Securities, the
Company, the Selling Holders and the underwriter(s) enter into an underwriting
or purchase agreement relating to such offering which
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contains provisions covering indemnification and contribution among the parties,
the indemnification and contribution provisions of this Section 16(f) shall be
deemed inoperative for purposes of such offering.
(g) Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 14(e) to the fullest extent permitted by
law; provided, however, that (i) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 16(f), (ii) no seller of
Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of such fraudulent
misrepresentation, and (iii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
(h) Reports Under Exchange Act. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the 1933 Act
or any other similar rule or regulation of the SEC that may at any time permit
the Holders to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144; and
(ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the 1933 Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); and
(iii) furnish to each Holder so long as such Holder
owns Registrable Securities, promptly upon request, (i) a written statement by
the Company that it has complied with the reporting requirements of Rule 144,
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested to permit the Holders to sell such
securities without registration pursuant to Rule 144.
(i) Assignment of the Registration Rights. The rights to have
the Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Holders to transferees or assignees of all or any
portion of such securities only if: (i) the Holder agrees in writing with the
transferee or assignee to assign such rights, (ii) the Company is, within a
reasonable time after such transfer or assignment, furnished with written notice
of the name and address of such transferee or assignee (iii) such assignment is
in accordance with and permitted by law and all other agreements between the
transferor or assignor and the Company, including without limitation,
stockholder's agreements, warrants and subscription agreements, and the
transferor or assignor otherwise is not in material default of any obligation to
the Company under any such other agreement, and (iv) at or before the time the
Company received the written notice contemplated by
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clause (ii) of this sentence, the transferee or assignee agrees in writing with
the Company to be bound by all of the provisions contained herein.
17. Miscellaneous.
(a) Construction. Unless the context indicates otherwise, the
term "Holder" shall include any transferee or transferees of this Warrant
pursuant to Section 15(b), and the term "Warrant" shall include any and all
warrants outstanding pursuant to this Agreement, including those evidenced by a
certificate or certificates issued upon division, exchange, substitution or
transfer pursuant to Section 15.
(b) Restrictions. By receipt of this Warrant, the Holder makes
the same representations with respect to the acquisition of this Warrant as the
Holder is required to make upon the exercise of this Warrant and acquisition of
the Shares purchasable hereunder as set forth in the Form of Investment Letter
attached as Exhibit A to the Notice of Exercise attached hereto.
(c) Notices. Unless otherwise provided, any notice required or
permitted under this Warrant shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or three
(3) days following deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified (or
one (1) day following timely deposit with a reputable overnight courier with
next day delivery instructions), or upon confirmation of receipt by the sender
of any notice by facsimile transmission, at the address indicated below or at
such other address as such party may designate by ten (10) days' advance written
notice to the other parties.
To Holder:
Attention:
To the Company: DuraSwitch Industries, Inc.
234 S. Extension Road, Suite 103
Mesa, Arizona 85210
Attention:
(d) Governing Law. This Warrant shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
(e) Entire Agreement. This Warrant, the exhibits and schedules
hereto, and the documents referred to herein, constitute the entire agreement
and understanding of the parties hereto with respect to the subject matter
hereof, and supersede all prior and contemporaneous agreements and
understandings, whether oral or written, between the parties hereto with respect
to the subject matter hereof.
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(f) Binding Effect. This Warrant and the various rights and
obligations arising hereunder shall inure to the benefit of and be binding upon
the Company and its successors and assigns, and Holder and its successors and
assigns.
(g) Waiver; Consent. This Warrant may not be changed, amended,
terminated, augmented, rescinded or discharged (other than by performance), in
whole or in part, except by a writing executed by the parties hereto, and no
waiver of any of the provisions or conditions of this Warrant or any of the
rights of a party hereto shall be effective or binding unless such waiver shall
be in writing and signed by the party claimed to have given or consented
thereto.
(h) Severability. If one or more provisions of this Warrant
are held to be unenforceable under applicable law, such provision shall be
excluded from this Warrant and the balance of the Warrant shall be interpreted
as if such provision were so excluded and the balance shall be enforceable in
accordance with its terms.
(i) Counterparts. This Warrant may be signed in several
counterparts, each of which shall constitute an original.
IN WITNESS WHEREOF, the parties hereto have executed this
Common Stock Warrant effective as of the date hereof.
DATED:________, 1999 THE COMPANY:
DuraSwitch Industries, Inc.
By:________________________________________
Its:_______________________________________
HOLDER:
By:________________________________________
Its:_______________________________________
16
<PAGE> 17
NOTICE OF EXERCISE
To: DURASWITCH INDUSTRIES, INC.
1. The undersigned hereby elects to purchase _____________
shares of Common Stock, $.001 par value per Share ("Stock") of DuraSwitch
Industries, Inc., a Nevada corporation (the "Company") pursuant to the terms of
the attached Warrant, and tenders herewith payment of the purchase price
pursuant to the terms of the Warrant.
2. Attached as Exhibit A is an investment representation
letter addressed to the Company and executed by the undersigned as required by
Section 14 of the Warrant.
3. Please issue certificates representing the shares of Stock
purchased hereunder in the names and in the denominations indicated on Exhibit A
attached hereto.
4. Please issue a new Warrant for the unexercised portion of
the attached Warrant, if any, in the name of the undersigned.
Holder:____________________________________
Dated: _______________
___________________________________________
By:________________________________________
Its:_______________________________________
17
<PAGE> 18
NET ISSUANCE ELECTION NOTICE
To: DURASWITCH INDUSTRIES, INC. Date:_____________
The undersigned hereby elects under Section 2 of the attached
Warrant to surrender the right to purchase ___________ shares of Common Stock
pursuant to the attached Warrant. The Certificate(s) for the shares issuable
upon such net issuance election shall be issued in the name of the undersigned
or as otherwise indicated below.
Signature:
________________________________________
Name for Registration
________________________________________
Mailing Address
________________________________________
________________________________________
18
<PAGE> 1
Exhibit 23.1
[McGLADREY & PULLEN, LLP LETTERHEAD]
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
Duraswitch Industries, Inc.
Mesa, Arizona
We hereby consent to the use in this Registration Statement Form SB-2, Amendment
No. 4 (No. 333-79969) of our report, dated October 1, 1998, relating to the
consolidated financial statements of Duraswitch Industries, Inc. We also consent
to the reference of our Firm under the caption "Experts" in the prospectus.
/s/ McGladrey & Pullen, LLP
Phoenix, Arizona
August 17, 1999
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to Registration Statement No.
333-79969 on Form SB-2 of DuraSwitch Industries, Inc. of our report of Aztec
Industries, Inc. dated February 26, 1999 and our report of DuraSwitch
Industries, Inc. dated February 26, 1999 (except for Note 2, as to which the
date is August 17, 1999) appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
August 17, 1999
