<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VCS TECHNOLOGIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 06-1428705
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
456 GLENBROOK ROAD
STAMFORD, CT 06906
(203) 327-3332
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
AND PRINCIPAL PLACE OF BUSINESS)
------------------------
WILLIAM E. WHEATON, III
CHIEF EXECUTIVE OFFICER
VCS TECHNOLOGIES, INC.
456 GLENBROOK ROAD
STAMFORD, CT 06906
(203) 327-3332
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
JOHN J. HUGHES, JR., ESQ. LAWRENCE B. FISHER, ESQ.
MOSKOWITZ ALTMAN & HUGHES LLP ORRICK, HERRINGTON & SUTCLIFFE LLP
11 EAST 44TH STREET, SUITE 504 30 ROCKEFELLER PLAZA
NEW YORK, NY 10017 NEW YORK, NY 10112
(212) 953-1121 (212) 506-3660
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(2) PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock par value $.001............ 1,150,000 $7.00 $8,050,000 $2,374.75
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) of the Securities Act.
(2) Includes 150,000 shares of Common Stock subject to the over-allotment option
granted to the Representative of the Underwriters.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN
ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
[LOGO OF VCS TECHNOLOGIES, INC. APPEARS HERE]
VCS TECHNOLOGIES, INC.
1,000,000 SHARES OF COMMON STOCK
------------------------
All of the shares of Common Stock, par value $.001 (the "Common Stock")
offered hereby (the "Offering") are being sold by VCS Technologies, Inc. ("VCS"
or the "Company"). Prior to this Offering, there has been no public market for
the Common Stock of the Company and there can be no assurance that such a market
will develop after the completion of the Offering or, if developed, that it will
be sustained. It is currently anticipated that the initial public offering price
will be between $6.00 and $7.00 per share. For information regarding the factors
considered in determining the initial public offering price of the Common Stock,
see "Risk Factors" and "Underwriting." The Company has applied for listing of
the Common Stock for quotation on The Nasdaq SmallCap Market under the symbol
"VCST."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 AND
"DILUTION."
------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per share......................................... $ $ $
Total(3).......................................... $ $ $
</TABLE>
(1) Does not include additional compensation payable to Gilford Securities
Incorporated (the "Representative") in the form of: (a) a warrant to
purchase up to 100,000 shares of Common Stock (10% of the number of shares
of Common Stock underwritten for the account of the Company) exercisable for
a period of four years commencing one year from the date of this Prospectus
at a price equal to 120% of the initial public offering price (the
"Representative's Warrants"); and (b) a non-accountable expense allowance.
In addition, see "Underwriting" for information concerning indemnification
and contribution arrangements with the Underwriters and other compensation
payable to the Representative.
(2) Before deducting estimated expenses of $445,000 payable by the Company,
including the Representative's non-accountable expense allowance.
(3) The Company has granted to the Underwriters an option (the "over-allotment
option"), exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to 150,000 additional shares of Common Stock upon
the same terms and conditions as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $ , $ and $ , respectively. See "Underwriting."
------------------------
The Common Stock is being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify the
Offering and to reject any order in whole or in part. It is expected that
delivery of the Common Stock will be made against payment therefor at the
offices of Gilford Securities Incorporated, New York, New York, on or about
, 1998.
GILFORD SECURITIES INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET, ON
NASDAQ OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
------------------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
"VCS Technologies" is a trademark of the Company. This prospectus also
includes the proprietary trademarks and trade names of other companies.
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information including the Company's
financial statements (including the notes thereto), appearing elsewhere in this
Prospectus. Unless otherwise indicated, all financial information and share and
per-share data in this Prospectus (i) gives effect to the Company's 1-2.64
reverse stock split in September 1998 and (ii) assumes no exercise or conversion
of (a) the over-allotment option, (b) the Representative's Warrants,
(c) outstanding warrants, (d) options granted or available for grant under the
Company's 1997 Incentive Stock Option Plan, (e) convertible promissory notes ,
or (f) the Series A Convertible Preferred Stock. The Common Stock offered hereby
involve a high degree of risk and immediate substantial dilution. See "Risk
Factors," "Dilution" and "Underwriting."
THE COMPANY
The Company is a full service provider of interactive video communications
solutions. The Company resells, installs and integrates videoconferencing
equipment and systems and video streaming software and systems, which includes
the Company's proprietary software that enables browsing, recall and playback of
digitized video content on an interactive basis. Additionally, the Company
records, digitizes, stores, edits and delivers or "streams" on-demand video and
audio programs over telecommunications lines and the Internet ("Video On-Demand
Services").
Real-time videoconferencing and on-demand video streaming enable more
effective and cost-efficient enterprise collaboration across disparate physical
locations. The utilization of videoconferencing and on-demand video streaming
systems has increased dramatically in the last several years due to
technological advancements, a significant decline in the costs of
videoconferencing systems and video streaming systems and an attempt by
businesses to reduce travel costs and speed the delivery of products to market.
According to TeleSpan Publishing Corporation, the combined sales revenues from
the sale and use of videoconferencing systems alone grew to $2.7 billion for the
year ended December 31, 1996.
The Company has developed strong relationships as an authorized reseller of
videoconferencing systems and video streaming systems for the established market
leaders. VCS resells a full line of videoconferencing equipment and systems for
Intel Corporation ("Intel"), PictureTel Corporation ("PictureTel") and
VideoServer, Inc. ("VideoServer"), resells video streaming systems for Starlight
Networks, Inc. ("Starlight") and RealNetworks, Inc. ("RealNetworks") and resells
video publishing software for Digital Lava, Inc. ("Digital Lava"). The Company
also provides a full range of installation, integration and support services in
connection with such systems sales. Additionally, VCS and Starlight have entered
into a joint marketing arrangement and Starlight has qualified the Company's
proprietary software for interaction with Starlight's video streaming product
line.
The Company's Video On-Demand Services enable customers to record and
digitize business meetings, training sessions or other presentations or
demonstrations on video and to retrieve the video content for later distribution
to employees, students or other end-users at different times and multiple
locations. The Company has entered into licensing agreements to provide access
to approximately 500 training tapes and believes that it is one of the leading
distributors of digitized training videotapes in the United States. In addition,
the Company's Video On-Demand Services provide customers with the ability to
edit and enhance recorded video content. The Company has supplemented its own
editing and enhancement capabilities by entering into a licensing agreement with
Digital Lava, which grants the Company's customers access to Digital Lava's
video publishing software. This video publishing software allows users to
(i) organize and manage video content and other information from diverse
sources, (ii) create links to other data and (iii) distribute the content on
CD-ROM or DVD or stream the content over intranets or the Internet.
Additionally, the Company has entered into a joint marketing arrangement with
AT&T Corp. ("AT&T"), the largest provider of videoconferencing services in the
United States, pursuant to which AT&T offers the Company's Video On-Demand
Services to all of its videoconferencing customers.
The Company's objective is to become a leading provider of interactive
video communications solutions. To achieve its objective, the Company intends to
further establish itself as a recognized reseller of videoconferencing and video
streaming systems and products by expanding its sales and marketing efforts and
to grow its Video On-
3
<PAGE>
Demand Services through additional joint marketing arrangements, by expanding
its library of video tapes through additional licensing relationships, by
leveraging its access to customers of videoconferencing and video streaming
systems and by incorporating new product and technology developments as they
become available.
The Company is a Delaware corporation incorporated in July 1995. The
Company's principal executive offices are located at 456 Glenbrook Road, CT
06906, its telephone number is (203) 327-3332.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...... 1,000,000 shares
Common Stock outstanding after the
Offering(1)............................ 1,617,509 shares
Series A Convertible Preferred Stock..... 4,796 shares
Use of Proceeds.......................... The Company intends to use the net proceeds from the Offering to repay
short term indebtedness and accrued interest, for sales and marketing,
for capital expenditures and for general corporate and working capital
purposes. See "Use of Proceeds."
Proposed Nasdaq SmallCap Market Symbol... "VCST"
Risk Factors............................. An investment in the Common Stock offered hereby involves a high degree
of risk and immediate substantial dilution and should be made only by
investors who can afford the loss of their entire investment. See "Risk
Factors" and "Dilution."
</TABLE>
- ------------------
(1) Does not include: (a) 100,000 shares of Common Stock reserved for issuance
upon exercise of the Representative's Warrants; (b) 209,091 shares of Common
Stock reserved for issuance upon exercise of stock options available for
grant under the Company's 1997 Incentive Stock Option Plan (the "Stock
Option Plan"); (c) 75,000 shares of Common Stock reserved for issuance upon
the exercise of stock options granted under the Stock Option Plan as of the
effective date of this Prospectus at a weighted average exercise price of
$4.00 per share; (d) 294,318 shares of Common Stock reserved for issuance
upon exercise of warrants held by employees, directors and consultants of
the Company at a weighted average exercise price of $1.63 per share;
(e) 96,154 shares of Common Stock reserved for issuance upon exercise of
convertible promissory notes at a conversion price of $5.20 per share; and
(f) 56,424 shares of Common Stock reserved for issuance upon exercise of
Series A Convertible Preferred Stock at a conversion price of $8.50 per
share. See "Management--1997 Incentive Stock Option Plan," "Description of
Securities" and "Underwriting," and Notes 6, 7 and 12 of Notes to Financial
Statements.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JULY 12,
1995
(INCEPTION)
THROUGH YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------ ---------------------------- ----------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net................................ $131,750 $ 274,755 $ 96,722 $ 49,517 $ 740,548
Cost of revenues............................. 89,359 193,653 76,598 39,385 468,591
-------- ---------- ------------ ---------- ----------
Gross profit................................. 42,391 81,102 20,124 10,132 271,957
Operating loss............................... (77,577) (464,390) (1,579,806) (849,201) (303,742)
Net loss..................................... $(77,577) $ (488,431) $ (1,710,361) $ (870,599) $ (443,757)
-------- ---------- ------------ ---------- ----------
-------- ---------- ------------ ---------- ----------
Basic and diluted net loss per share......... $ (0.20) $ (1.25) $ (3.69) $ (1.89) $ (0.95)
-------- ---------- ------------ ---------- ----------
-------- ---------- ------------ ---------- ----------
Shares used in the net loss per share
calculations(1)............................ 384,470 390,909 463,005 461,780 465,530
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 (UNAUDITED)
---------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................................ $ 190,310 $ 190,310 $5,280,310
Working capital (deficit)........................................... (1,148,665) (516,421) 4,938,579
Total assets........................................................ 1,070,701 1,070,701 6,110,701
Total liabilities................................................... 2,932,067 2,292,105 1,927,105
Stockholders' equity (deficit)...................................... (1,861,366) (1,221,404) 4,183,596
</TABLE>
- ------------------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in per share calculations.
(2) On a Pro Forma basis to reflect the August 1998 restructuring of
indebtedness and the issuance of Common Stock, Common Stock purchase
warrants and Series A Convertible Preferred Stock in connection therewith.
See Note 12 of Notes to Financial Statements.
(3) As adjusted to reflect the sale of 1,000,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $6.50
per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company. See "Use
of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby is speculative in nature,
involves a high degree of risk and should only be made by an investor who can
afford the loss of his entire investment. In addition to the other information
contained in this Prospectus, prospective investors should carefully consider
the following risk factors in evaluating whether to purchase the Common Stock
offered hereby. Moreover, prospective investors are cautioned that the
statements in this Prospectus that are not descriptions of historical facts may
be forward looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those set forth below and elsewhere in this
Prospectus.
GOING CONCERN ASSUMPTION; LIMITED OPERATING HISTORY; WORKING CAPITAL
DEFICIT; ACCUMULATED DEFICIT; HISTORY OF LOSSES AND ANTICIPATION OF FUTURE
LOSSES. The Company was incorporated in July, 1995 and has only a limited
operating history on which an evaluation of the Company and its prospects can be
based. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in early stages of
development, particularly companies in rapidly evolving markets such as
real-time videoconferencing and video streaming delivery over the Internet and
intranets. The Company has incurred significant losses since its inception and
may continue to incur substantial operating losses for the foreseeable future.
As of June 30, 1998, the Company had a working capital deficit of $1,148,665 and
an accumulated deficit of $2,720,126. The Company's independent auditors' report
on the Company's financial statements as of December 31, 1997 and for the year
then ended contains an explanatory paragraph indicating that the Company's
operating losses since inception, working capital deficiency and net capital
deficiency raise substantial doubt about its ability to continue as a going
concern. To achieve and sustain profitability, the Company must, among other
things, establish market acceptance of its existing products and services,
successfully develop new products and services, respond quickly and effectively
to competitive, market and technological developments, expand sales and
marketing operations, broaden customer support capabilities, control expenses
and continue to attract and retain qualified personnel. There can be no
assurance that the Company will achieve or sustain profitability. See
"--Unpredictability of Future Revenues; Potential Fluctuation in Quarterly
Operating Results," "--Competition" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATION IN QUARTERLY
OPERATING RESULTS. As a result of the Company's limited operating history and
the emerging nature of the markets in which it competes, the Company is unable
to forecast accurately its revenues. The Company expects to experience
significant fluctuations in its future quarterly operating results due to a
variety of factors, many of which are outside the Company's control, including:
demand for the products and services offered by the Company; introduction or
enhancement of products and services by the Company and its competitors; market
acceptance of new products and services of the Company and its competitors;
price reductions by the Company or its competitors or changes in how products
and services are priced; the mix of products and services sold by the Company
and its competitors; the mix of distribution channels through which the
Company's products are licensed and sold; the mix of international and U.S.
revenues; costs of litigation and intellectual property protection; the growth
in the use of the Internet and intranets; the growth in the use of real-time
videoconferencing and video streaming solutions; the Company's ability to
attract, train and retain qualified personnel; the amount and timing of
operating costs and capital expenditures related to expansion of the Company's
business, operations and infrastructure; governmental regulations; and general
economic conditions and economic conditions specifically related to the video
communications market and the Internet. It is often difficult to forecast what
the effect of such factors would be, or the effect that any such factors or any
combination thereof would have, on the Company's results of operations for any
fiscal quarter. There can be no assurance that the Company will be able to
achieve historical revenue levels. Based on the foregoing, the Company believes
that its quarterly revenues, expenses and operating results could vary
significantly in the future, and that period-to-period comparisons should not be
relied upon as indications of future performance.
As a result of the Company's limited operating history, the Company does
not have relevant historical financial data for a significant number of periods
on which to base planned operating expenses. The Company's expense levels are
based in part on its expectations with regard to future revenues. The Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. As a result, any
7
<PAGE>
significant shortfall in demand for the products and services offered by the
Company relative to the Company's expectations would have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. Due to the foregoing factors, it is likely that in some future
quarters the Company's operating results will fall below the expectations of
securities analysts and investors, which would likely have a material adverse
effect on the trading price of the Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
COMPETITION. The markets for the Company's products and services are
intensely competitive. Pricing pressure, rapid development, feature upgrades,
and new undefined technologies characterize the general nature of the industry.
The Company competes with videoconferencing, video streaming and
teleconferencing companies, along with companies that provide Internet
broadcasting services to businesses and other organizations. Numerous companies,
including Broadcast.com Inc ("Broadcast.com") and VStream Incorporated, offer
products and services which compete directly or indirectly with one or more of
the Company's products and services. Most of the Company's competitors and
potential competitors have longer operating histories, significantly greater
financial, management, technical, marketing and other resources, greater name
recognition, and a larger installed base of customers than the Company. In
addition, many of the Company's competitors have well-established relationships
with current and potential customers of the Company, have extensive knowledge of
the videoconferencing and video streaming industry, and are capable of offering
a single-vendor solution. As a result, the Company's competitors may be in a
better position than the Company to devote significant resources toward the
development, promotion and sale of competing products and to respond more
quickly to new or emerging technologies and changes in customer requirements.
The Company also expects that the competition will increase as a result of
videoconferencing, video streaming and computer hardware and software industry
consolidations and alliances. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete successfully against current and future competitors,
that competition will not intensify or that competitive pressure faced by the
Company will not materially adversely affect its business, financial condition
and results of operations.
POSSIBLE NEED FOR ADDITIONAL FINANCING. The Company anticipates that the
net proceeds from this Offering and cash provided by operations will enable it
to meet its capital and operational requirements for at least the 12 months
following the date of this Prospectus, although there can be no assurance that
such resources will be sufficient to satisfy the Company's capital and
operational requirements for such period. This expectation is based on the
Company's current operating plan which can change as a result of many factors,
and the Company could require additional funding sooner than anticipated. In
addition, unplanned acquisition and development opportunities and other
contingencies may arise, which also could require additional capital. Sources of
funds may include the issuance of common or preferred stock sold in a public
offering or in private placements, or the issuance of debt or bank financing. To
the extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities could result in
dilution to the Company's stockholders. Warrants may also be issued in
connection with debt or bank financing, which could also result in dilution to
the Company's stockholders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company presently has a financing agreement whereby the Company receives
purchase order financing up to a maximum of $1 million and accounts receivable
financing up to a maximum of $2 million. The financing agreement has a term of
one year ending in March, 1999. There can be no assurance that the Company would
be able to enter into a new financing agreement or another similar financing
agreement on substantially equivalent terms, or obtain additional financing on a
timely basis, on favorable terms, or at all. If the Company is unable to obtain
such financing, or generate funds from operations sufficient to meet its needs,
the Company would be materially adversely affected. See "Use of Proceeds."
DEVELOPING MARKETS; DEPENDENCE ON THE INTERNET AND INTRANETS AS MEDIUMS OF
COMMERCE AND COMMUNICATIONS. The market for the products and services offered
by the Company has only recently begun to develop and is evolving rapidly. This
market continues to experience new developments in technology, product
distribution methods, and marketing and licensing relationships. The development
of a market for the products and services offered by the Company also depends on
increased use of the Internet and intranets for video streaming and for
information, publication, distribution and commerce. Continued growth in the use
of the
8
<PAGE>
Internet, generally, and in the use of videoconferencing and video streaming, in
particular, will depend on potential increases in available bandwidth or
transmission speeds or on other technological improvements. There can be no
assurances that such potential increases or improvements will be achieved.
Changes in network infrastructure, transmission and content delivery methods and
underlying software platforms, and the emergence of new Internet access devices
such as TV set-top boxes could dramatically change the structure and competitive
dynamic of the market for video communications solutions. Critical issues
concerning use of the Internet and intranets (including security, reliability,
cost, ease of use and quality of service) remain unresolved and may affect the
growth of and the degree to which business is conducted over the Internet and
intranets. If the market for the products and services offered by the Company
fails to grow, develops more slowly than expected or becomes saturated with
competing products or services, the Company's business, financial condition and
results of operations would be materially adversely affected.
UNCERTAINTY OF ACCEPTANCE OF STREAMING MEDIA TECHNOLOGY. The Company's
success partially depends on the market acceptance of streaming media technology
provided by companies such as RealNetworks and Starlight. Prior to the advent of
streaming technology, Internet users could not initiate the playback of audio or
video content until such content was downloaded in its entirety, resulting in
significant waiting times. As a result, live broadcasts of audio and video
content over the Internet or intranets were not possible. Early streaming media
technology suffered from poor audio quality, and video streaming at 28.8 kbps
(thousands of bits per second) currently is of lower quality than traditional
media broadcasts. In addition, congestion over the Internet and packet loss may
interrupt audio and video streams, resulting in unsatisfying user experiences.
Furthermore, in order for users to receive streaming media over corporate
intranets, information systems managers may need to reconfigure such intranets.
Some information systems managers may block reception of streamed media because
of bandwith constraints on corporate intranets. Widespread adoption of streaming
media technology depends on overcoming these obstacles, improving audio and
video quality and educating customers and users in the use of streaming media
technology. If streaming media technology fails to achieve broad commercial
acceptance or such acceptance is delayed, the Company's business, results of
operations and financial condition could be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The Company's
performance and development is substantially dependent on the continued services
of certain members of senior management, generally, and William E. Wheaton III,
Chief Executive Officer, in particular. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical personnel and management. Competition for such personnel is intense
and there can be no assurance that the Company will be able to retain its key
management and technical employees or that it will be able to attract or retain
additional qualified technical personnel and management in the future. The
inability to attract and retain the necessary technical personnel and management
could have a material adverse effect upon the Company's business, result of
operations and financial condition. See "Management."
SYSTEM INTEGRITY RISKS. The Company's ability to provide a consistent
level of high-quality customer service depends in part on the efficient and
uninterrupted operation of its computer and communications hardware systems.
Substantially all of the Company's computer and communications hardware is
located at a single, leased facility in Stamford, Connecticut. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and similar
events. The Company does not presently have offsite fully redundant systems or a
formal disaster recovery plan; therefore, there can be no assurance that a
system failure would not have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's servers
are vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions, delays, loss of data or the
inability to accept and fulfill customer orders. The occurrence of any of the
foregoing risks would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business."
RISK OF TECHNOLOGICAL CHANGE. The market for videoconferencing, video
streaming systems and Internet broadcast services is characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. The emerging character of these products and services and
their rapid evolution will require the Company to continuously adopt the leading
technologies, continue to develop its technological expertise, and enhance its
services. Changes in network infrastructure, transmission and content delivery
methods
9
<PAGE>
and underlying software platforms and the emergence of new broadband
technologies, such as xDSL and cable modems, could dramatically change the
structure and competitive dynamic of the market for videoconferencing and
streaming media solutions. In particular, technological developments that
accelerate the adoption of broadband access technologies or advancements in
streaming and compression technologies may require the Company to expend
resources to address these developments. There can be no assurance that the
Company will be successful in responding quickly, cost effectively and
sufficiently to these or other such developments. In addition, the widespread
adoption of new Internet technologies or standards could require substantial
expenditures by the Company to modify or adapt its services. A failure by the
Company to rapidly respond to technological developments would have a material
adverse effect on the Company's business, results of operations and financial
condition.
INTELLECTUAL PROPERTY. The Company's success depends in part on its
ability to protect its proprietary technology and other copyrights, trademarks,
trade secrets and similar intellectual property, and the Company relies on a
combination of copyright and trademark laws, trade secret protection,
confidentiality and non-disclosure agreements and contractual provisions with
its employees and with third parties to establish and protect its proprietary
rights in its products and technology. There can be no assurance that these
steps will be adequate, that the Company will be able to secure trademark
registrations for all of its marks in the United States or other countries or
that third parties will not infringe upon or misappropriate the Company's
copyrights, trademarks, service marks and similar proprietary rights. In
addition, effective copyright and trademark protection may be unenforceable or
limited in certain countries. In the future, litigation may be necessary to
enforce and protect the Company's trade secrets, copyrights and other
intellectual property rights. The Company also licenses certain of its
proprietary rights to third parties. There can be no assurance that the
licensees will abide by compliance and quality control guidelines with respect
to such proprietary rights or that such licenses will not take actions that
would materially adversely affect the Company's business.
The Company may also be subject to litigation to defend against claims of
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. If competitors of the Company
prepare and file applications in the United States that claim trademarks used or
registered by the Company, the Company may oppose those applications and be
required to participate in proceedings before the United States Patent and
Trademark Office to determine priority of rights to the trademark, which could
result in substantial costs to the Company. An adverse outcome could require the
Company to license disputed rights from third parties or to cease using such
trademark. Any litigation regarding the Company's proprietary rights could be
costly and divert management's attention, result in the loss of certain of the
Company's proprietary rights, require the Company to seek licenses from third
parties and prevent the Company from selling its services, any one of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "--Government Regulation and Legal
Uncertainty."
As part of its confidentiality procedures, the Company generally enters
into agreements with its employees and consultants and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its proprietary information or that agreements entered into
for that purpose would be enforceable. Notwithstanding the precautions taken by
the Company, it might be possible for a third party to copy or otherwise obtain
and use the Company's proprietary information without authorization. The laws of
some countries may afford the Company little or no effective protection of its
intellectual property.
CONTROL BY CURRENT MANAGEMENT. After the Offering, the Company's directors
and executive officers and their affiliates will beneficially own approximately
32.3% of the outstanding Common Stock. As a result, current management may be
able to exercise control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such control could delay or prevent a change in control of the
Company or adversely affect the market price of the Common Stock. See
"Management" and "Principal Stockholders."
MANAGEMENT OF GROWTH. The Company intends to expand primarily by
increasing its marketing activities and its sales force. The Company expects to
incur significant expenses related to the planned expansion prior to the
Company's realization of the benefits, if any, of such expansion. Accordingly,
the Company expects that the incurrence of these expenses will adversely affect
the Company's earnings and working capital in the periods
10
<PAGE>
prior to the Company's realization of the benefits, if any, of any expansion.
There can be no assurance that the Company's systems, procedures or controls
will be adequate to support its current or future operations or that the
Company's management will be able to manage the expansion and still achieve the
rapid execution necessary to exploit fully the market for the Company's products
and services. To manage its growth, the Company must implement, improve and
effectively utilize its operational, management, marketing and financial systems
and train and manage its employees. Certain of the Company's senior management
have only recently joined the Company. These individuals have not previously
worked together and are in the process of integrating as a management team.
There can be no assurance that the Company will be able to manage effectively
the expansion of its operations or that the Company's current personnel,
systems, procedures and controls will be adequate to support the Company's
operations. Any failure of management to manage effectively the Company's growth
could have a material adverse effect on the Company's business, results of
operations and financial condition.
DEPENDENCE ON SUPPLIERS. For the six months ended June 30, 1998,
approximately 34% and 18% of the Company's consolidated cost of revenues were
attributable purchase of equipment manufactured by PictureTel and Intel,
respectively. Termination of or change of the Company's business relationships
with PictureTel or Intel, disruption in supply, failure of PictureTel or Intel
to remain competitive in product quality, function or price or a determination
by PictureTel or Intel to reduce reliance on independent providers such as the
Company, among other things, would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is a party to agreements with PictureTel and Intel that authorize the Company to
serve as a non-exclusive dealer and sales agent, respectively, in certain
geographic territories. The PictureTel and Intel agreements can be terminated
without cause upon written notice by the suppliers, subject to certain
notification requirements. There can be no assurance that these agreements will
not be terminated, or that they will be renewed on terms acceptable to the
Company. These suppliers have no affiliation with the Company and are
competitors of the Company.
NO ASSURANCE OF NASDAQ SMALLCAP MARKET CONTINUED LISTING; RISK OF
LOW-PRICED SECURITIES; RISK OF APPLICATION OF PENNY STOCK RULES. The Board of
Governors of the National Association of Securities Dealers, Inc. has
established certain standards for the continued listing of a security on the
Nasdaq SmallCap Market. The maintenance standards require, among other things,
that an issuer have net tangible assets of at least $2,000,000; that the minimum
bid price for the listed securities be $1.00 per share; that the minimum market
value of the public float be at least $1,000,000; and that there be at least two
market makers for the issuer's securities. A deficiency in either the market
value of the public float or the bid price maintenance standard will be deemed
to exist if the issuer fails the individual stated requirement for ten
consecutive trading days. There can be no assurance that the Company will
continue to satisfy the requirements for maintaining a Nasdaq SmallCap Market
listing. If the Company's Common Stock were to be excluded from the Nasdaq
SmallCap Market, it would adversely affect the prices of such securities and the
ability of holders to sell them, and the Company would be required to comply
with the initial listing requirement to be relisted on the Nasdaq SmallCap
Market.
If the Company is unable to satisfy the maintenance requirements and the
price per share were to drop below $5.00, then unless the Company satisfied
certain net tangible asset or revenue tests, the Company's Common Stock would
become subject to certain penny stock rules promulgated by the Securities and
Exchange Commission (the "Commission"). The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document prepared by the
Commission that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from such rules, the broker-
dealer must make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules. If the Common Stock becomes
subject to the penny stock rules, investors in the Offering may find it more
difficult to sell their Common Stock.
NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK; ARBITRARY DETERMINATION OF
OFFERING PRICE; PRICE VOLATILITY. Prior to this Offering, there has been no
public market for the Common Stock, and there can be no
11
<PAGE>
assurance that an active trading market for any of the Common Stock will develop
or, if developed, be sustained after the Offering. See "Underwriting." The
initial public offering price of the Common Stock has been determined
arbitrarily by negotiations between the Company and the Representative. Factors
considered in such negotiations, in addition to prevailing market conditions,
included the history of and prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, its capital structure and the market for initial public offerings.
Therefore, the public offering price of the Common Stock does not necessarily
bear any relationship to the Company's assets, book value, results of operations
or any other established valuation criteria and may not be indicative of prices
that may prevail at any time or from time to time in the public market for the
Common Stock. See "Underwriting."
VOLATILITY OF STOCK PRICE. The trading price of the Common Stock is likely
to be highly volatile and could be subject to wide fluctuations in response to
factors such as actual or anticipated variations in quarterly operating results,
announcements of technological innovations, new sales formats or new services by
the Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in Internet markets, changes in the market
valuations of other companies in similar markets, announcements by the Company
or its competitors of significant acquisitions, strategic partnerships, joint
ventures, capital commitments, additions or departures of key personnel, sales
of Common Stock and other events or factors, many of which are beyond the
Company's control. In addition, the stock market in general, and the market for
technology companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many technology companies'
stocks are at or near historical highs and reflect price earnings ratios
substantially above historical levels. There can be no assurance that these
trading prices and price earnings ratios will be sustained. These broad market
and industry factors may materially adversely affect the market price of the
Common Stock, regardless of the Company's operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class-action litigation has often been instituted against such
companies. Such litigation, if instituted, could result in substantial costs and
a diversion of management's attention and resources, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this Offering,
1,617,509 shares of Common Stock (1,767,509 shares if the over-allotment option
is exercised in full) will be outstanding. The 1,000,000 shares (1,150,000
shares if the over-allotment option is exercised in full) offered hereby will be
immediately freely tradeable without restriction under the Securities Act of
1933, as amended (the "Securities Act"), except for any securities purchased by
an "affiliate" of the Company (as that term is defined in the Securities Act),
which securities will be subject to the resale limitations of Rule 144 under the
Securities Act ("Rule 144"). The remaining 617,509 shares of Common Stock are
"restricted securities," as that term is defined in Rule 144 under the
Securities Act, and may not be resold in a public distribution, except in
compliance with the registration requirements of the Securities Act or in
compliance with Rule 144. The sale, or availability for sale, of substantial
amounts of Common Stock in the public market subsequent to this Offering
pursuant to Rule 144 or otherwise could materially adversely affect the market
price of the Common Stock and could impair the Company's ability to raise
additional capital through the sale of its equity securities or debt financing.
Each officer and director of the Company, all holders of the shares of
Common Stock, and all holders of securities convertible into or exchangeable or
exercisable for shares of Common Stock have agreed not to, directly or
indirectly, offer, sell, transfer, pledge, assign, hypothecate or otherwise
encumber or dispose of any of the Company's securities, whether or not presently
owned, for a period of 13 months after the date of this Prospectus, without the
prior written consent of the Company and the Representative. The 617,509
restricted shares of Common Stock may be sold in accordance with Rule 144 at
various times beginning ninety days after the effective date of this Prospectus,
subject to the lock-up agreements described above. See "Shares Eligible for
Future Sale."
DILUTION. Purchasers of the Common Stock in this Offering will experience
immediate and substantial dilution in the net tangible book value of their
shares. Assuming an initial public offering price of $6.50 per share, dilution
to new investors would be $3.93 per share. Additional dilution will occur upon
exercise of outstanding warrants or stock options or conversion of outstanding
convertible notes. As a result, new investors will bear substantially all of the
risks inherent in an investment in the Company. See "Dilution."
12
<PAGE>
YEAR 2000 COMPLIANCE. The "year 2000 problem" is pervasive and complex, as
virtually every computer operation will be affected in some way. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
is in the process of working with its software vendors to assure that the
Company is prepared for the year 2000. The Company has not verified that its
vendors, suppliers or customers are year 2000 compliant. The Company does not
anticipate that it will incur significant operating expenses or be required to
invest heavily in computer systems improvements to be year 2000 compliant.
However, significant uncertainty exists concerning the potential costs and
effects associated with any year 2000 compliance. Any year 2000 compliance
problem of either the Company or its customers could have a material adverse
effect on the Company's business, results of operations and financial condition.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTY. The Company currently is
not subject to direct regulation by any governmental agency, other than laws and
regulations generally applicable to businesses, although certain United States
export controls and import controls of other countries, including controls on
the use of encryption technologies, may apply to the Company's products. Due to
the increasing popularity and use of the Internet, it is possible that a number
of laws and regulations may be adopted in the United States and abroad relating
to the Internet. It is possible that governments will enact legislation to
regulate areas such as content, network security, encryption and the use of key
escrow, data and privacy protection, electronic authentication or "digital"
signatures, illegal and harmful content, access charges and retransmission
activities. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, content, taxation, defamation and
personal privacy is uncertain. The majority of such laws were adopted before the
widespread use and commercialization of the Internet and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. Any such export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase the Company's cost of doing business, restrict
the Company's business or increase the Company's legal exposure, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
LIABILITY FOR INTERNET CONTENT. As a distributor of Internet content, the
Company faces potential liability for negligence, copyright, patent, trademark,
defamation, indecency and other claims based on the nature and content of the
materials that it makes available over the Internet. Such claims have been
brought, and sometimes successfully pressed, against Internet content
distributors. In addition, the Company could be exposed to liability with
respect to the content or unauthorized duplication or broadcast of content.
Although the Company maintains general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. In addition,
although the Company generally requires its content providers to indemnify the
Company for such liability, such indemnification may be inadequate. Any
imposition of liability that is not covered by insurance, is in excess of
insurance coverage or is not covered by an indemnification by a content provider
could have a material adverse effect on the Company's business, results of
operations and financial condition.
SALES AND OTHER TAXES. The Company currently does not collect sales or
similar taxes with respect to the sale of products or services into states and
countries other than the State of Connecticut. However, one or more states or
foreign countries may seek to impose sales or other tax obligations on companies
that engage in online commerce within their jurisdictions. A successful
assertion by one or more states or any foreign country that the Company should
collect sales or other taxes on the sale of products, license of technology or
provision of services, or remit payment of sales or other taxes for prior
periods, could have a material adverse effect on the Company's business,
financial condition and results of operations.
CERTAIN ANTI-TAKEOVER PROVISIONS. Certain statutory provisions and
provisions of the Company's Restated Certificate of Incorporation and Bylaws may
have the effect of discouraging, delaying or making more difficult a change in
control of the Company or preventing the removal of incumbent directors even if
some, or a majority, of the Company's stockholders were to deem such an attempt
to be in the best interest of the Company. The Company is governed by the
provisions of the General Corporation Law of the State of Delaware (the "DGCL")
Section 203, an anti-takeover law. In general, the law prohibits a public
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in
13
<PAGE>
a prescribed manner. "Business combination" is defined to include mergers, asset
sales and certain other transactions resulting in a financial benefit to the
stockholders. An "interested stockholder" is defined as a person who, together
with affiliates or associates, owns (or, within the prior three years, did own)
15% or more of a corporation's voting stock. As a result of the application of
Section 203, potential acquirors of the Company may be discouraged from
attempting to effect an acquisition transaction with the Company, thereby
possibly depriving holders of the Company's securities of certain opportunities
to sell or otherwise dispose of such securities at above market prices pursuant
to such transactions. In addition, the Company's Board of Directors has the
authority to issue up to 990,000 shares of Preferred Stock and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders
of the Company. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Company's Common Stock at a premium over
the market price of the Common Stock and may adversely affect the market price
of, and the other rights of the holders of, the Common Stock. The Company has no
present plans to issue shares of Preferred Stock. See "Description of
Securities."
ABSENCE OF DIVIDENDS. The Company has never declared or paid cash
dividends on its Common Stock and does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future. See "Dividend Policy."
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET. A significant number
of shares of Common Stock offered hereby may be sold to customers of the
Representative. Such customers subsequently may engage in transactions for the
sale or purchase of shares of Common Stock through or with the Representative.
Although it has no obligation to do so, the Representative intends to make a
market in the Common Stock and may otherwise effect transactions in the Common
Stock. If it participates in such market, the Representative may influence the
market, if one develops, for the Common Stock. Such market-making activity may
be discontinued at any time. Moreover, if the Representative sells the
securities issuable upon exercise of the Representative's Warrants, it may be
required under the Securities Exchange Act of 1934, as amended, to temporarily
suspend its market-making activities. The prices and liquidity of the Common
Stock may be significantly affected by the degree, if any, of the
Representative's participation in such market. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF SUBSTANTIAL SHARES OF COMMON STOCK
RESERVED. The Company has reserved a total of 830,987 shares of Common Stock
for issuance as follows: (i) 294,318 shares upon the exercise of outstanding
warrants; (ii) 100,000 shares upon the exercise of the Representative's
Warrants; (iii) 209,091 shares upon the exercise of stock options available for
grant under the Stock Option Plan; (iv) 75,000 shares upon the exercise of stock
options granted under the Stock Option Plan; (v) 96,154 shares upon the
conversion of outstanding convertible promissory notes; and (vi) 56,424 shares
upon the conversion of Series A Preferred Convertible Stock. The existence of
the Representative's Warrants and securities convertible into Common Stock may
adversely affect the Company's ability to consummate future equity financings.
Further, the holders of the warrants and options may exercise them at a time
when the Company would otherwise be able to obtain additional equity capital on
terms more favorable to the Company. See "Shares Eligible for Future Sales."
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS. The Company's
Restated Certificate of Incorporation eliminates the personal liability of
directors to the Company and its shareholders for monetary damages for breach of
fiduciary duties as a director to the fullest extent permitted by the DGCL. See
"Management--Limitation on Liability; Indemnification of Directors and
Officers."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
PROSPECTUS. This Prospectus contains certain forward-looking statements,
including, without limitation, the plans and objectives of management for future
product and future operations. The forward-looking statements included herein
are based on a successful execution of the Company's strategy, the assumption
that the software industry will not change materially or adversely, and that
there will be no unanticipated material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,000,000 shares of Common Stock offered hereby are estimated to be $5,405,000
based upon an assumed initial public offering price of $6.50 per share, after
deducting underwriting discounts, commissions and estimated expenses (or
approximately $6,253,250 if the over-allotment option granted to the
Underwriters is exercised in full). The net proceeds are expected to be used as
follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT
- --------------------------------------------------------------------------------- ---------- -------
<S> <C> <C>
Repayment indebtedness and accrued interest...................................... $ 365,000 6.8%
Sales and marketing.............................................................. 2,250,000 41.6
Capital expenditures............................................................. 750,000 13.9
General corporate and working capital............................................ 2,040,000 37.7
---------- -----
Total....................................................................... $5,405,000 100%
---------- -----
---------- -----
</TABLE>
The Company's intended allocation of net proceeds of the Offering is based
upon the Company's current plans and prevailing economic and industry
conditions. Although the Company does not currently contemplate material changes
with respect to allocation of the net proceeds, to the extent that management of
the Company finds that adjustment thereto is required, the amounts shown may be
adjusted among the uses indicated above.
The Company estimates that the amounts listed in the above table together
with cash from operations will meet the Company's cash requirements for at least
12 months from the date of this Prospectus. If the Underwriters exercise the
over-allotment option, the Company intends to add the net proceeds of such
exercise to working capital.
Pending their ultimate use, the net proceeds will be invested in
short-term, investment grade, interest-bearing securities, certificates of
deposit or direct or guaranteed obligations of the United States.
DIVIDEND POLICY
The Company has not paid, and does not anticipate paying, any dividends on
its Common Stock in the foreseeable future. The Company accrues annual dividends
on the outstanding shares of Series A Convertible Preferred Stock at the rate of
$8.50 per share, and no dividends may be paid on other classes of stock until
all accrued dividends on the Series A Convertible Preferred Stock have been
paid. In addition, the Series A Convertible Preferred Stock is entitled to
receive a liquidation preference in the amount of $100 per share plus all
accrued and unpaid dividends prior to any liquidation payments made to any other
class of stock. The Company currently intends to retain its future earnings for
use in operations and expansion of its business. Declaration and payment of
future dividends, if any, will be at the sole discretion of the Board of
Directors of the Company.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as of
June 30 , 1998; (ii) on a Pro Forma basis to reflect the August 1998
restructuring of indebtedness and the issuance of Common Stock, Common Stock
Purchase Warrants and Series A Convertible Preferred Stock in connection
therewith and (iii) as adjusted to give effect to the sale of the Common Stock
offered hereby at an assumed initial public offering price of $6.50 per share
and the initial application of the estimated net proceeds therefrom. The
following table should be read in conjunction with the financial statements and
related notes thereto included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- ------------ --------------
<S> <C> <C> <C>
Short-term debt..................................................... $ 582,298 $ 403,530 $ 238,530
----------- ------------ ------------
----------- ------------ ------------
Long-term debt...................................................... $ 1,106,712 $ 1,098,994 $ 1,098,994
----------- ------------ ------------
Stockholders' equity
Series A Convertible Preferred Stock, $.001 par value 10,000
shares authorized, no shares outstanding, actual; 4,796 shares
issued and outstanding (with a total liquidation preference of
$479,600), pro forma and pro forma as adjusted................. -- 5 5
Preferred Stock, $.001 par value; 990,000 shares authorized; no
shares outstanding............................................. -- -- --
Common Stock, $.001 par value; 49,000,000 shares authorized;
465,530 shares issued and outstanding, actual; 617,509 shares
issued and outstanding, pro forma; and 1,617,509 shares issued
and outstanding, pro forma as adjusted (1) .................... 466 617 1,617
Additional paid-in capital.......................................... 858,294 1,928,611 7,332,611
Accumulated deficit................................................. (2,720,126) (3,150,637) (3,150,637)
----------- ------------ ------------
Total stockholders' equity (deficit)........................... (1,861,366) (1,221,404) 4,183,596
----------- ------------ ------------
Total capitalization.............................................. $ (754,654) $ (122,410) $ 5,282,590
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
- ------------------
(1) Does not include: (a) 100,000 shares of Common Stock reserved for issuance
upon exercise of the Representative's Warrants; (b) 209,091 shares of Common
Stock reserved for issuance upon exercise of stock options available for
grant under the Company's 1997 Incentive Stock Option Plan (the "Stock
Option Plan"); (c) 75,000 shares of Common Stock reserved for issuance upon
the exercise of stock options granted under the Stock Option Plan as of the
effective date of this Prospectus at a weighted average exercise price of $
4.00 per share; (d) 294,318 shares of Common Stock reserved for issuance
upon exercise of warrants held by employees, directors and consultants of
the Company at a weighted average exercise price of $1.63 per share;
(e) 96,154 shares of Common Stock reserved for issuance upon exercise of
convertible promissory notes at a conversion price of $5.20 per share; and
(f) 56,424 shares of Common Stock reserved for issuance upon exercise of
Series A Convertible Preferred Stock at a conversion price of $8.50 per
share. See "Management--1997 Incentive Stock Option Plan," "Description of
Securities" and "Underwriting," and Notes 6, 7 and 12 of Notes to Financial
Statements.
(2) On a Pro Forma basis to reflect the August 1998 restructuring of
indebtedness and the issuance of Common Stock, Common Stock purchase
warrants and Series A Convertible Preferred Stock. See Note 12 of Notes to
Financial Statements.
(3) As adjusted to reflect the sale of 1,000,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $6.50
per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company. See "Use
of Proceeds" and "Capitalization."
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<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company at June 30,
1998 (after giving effect to the August 1998 restructuring of indebtedness and
the issuance of Common Stock, Common Stock purchase warrants and Series A
Convertible Preferred Stock in connection therewith. See Note 12 of Notes to
Financial Statements) was approximately $(1,296,404), or $(2.10) per share of
Common Stock. The pro forma net tangible book value (deficit) per share is equal
to total tangible assets less total liabilities, divided by the number of shares
of the Common Stock outstanding on such date. Dilution per share represents the
difference between the amount per share paid by purchasers in the Offering and
the pro forma net tangible book value per share after the Offering. After giving
effect to the sale of the shares of Common Stock being offered hereby and the
receipt of the net proceeds from the Offering by the Company, the pro forma as
adjusted net tangible book value of the Company at June 30, 1998 would have been
approximately $4,158,596 or $2.57 per share. This represents an immediate
increase in pro forma net tangible book value of $4.67 per share to existing
stockholders, and an immediate dilution of $3.93 per share to persons purchasing
shares of Common Stock at the initial public offering price. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................................... $6.50
Pro forma net tangible book value (deficit) before the Offering..................... $ (2.10)
Increase per share attributable to new investors.................................... 4.67
-------
Pro forma as adjusted net tangible book value per share after the Offering............ 2.57
-----
Dilution per share to new investors................................................... $3.93
-----
-----
</TABLE>
The following table summarizes at September 15, 1998 the number of shares
of Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by existing stockholders since inception and by new
investors in this Offering (at an assumed initial public offering price of $6.50
per share):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE PER
-------------------- --------------------- ---------
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................... 617,509 38.2% $ 601,015 8.5% $ .97
New investors............................................ 1,000,000 61.8 6,500,000 91.5 6.50
--------- ----- ---------- ----- -----
Totals................................................... 1,617,509 100% $7,101,015 100%
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
The tables do not give effect to the exercise or conversion of any
outstanding options, warrants, convertible promissory notes or shares of Series
A Convertible Preferred Stock. To the extent such options, warrants, convertible
promissory notes or shares of Series A Convertible Preferred Stock are exercised
or converted, there will be further dilution to new investors. See
"Management--Stock Options Plan," "Description of Capital Stock" and Notes 6, 7
and 12 of Notes to Financial Statements.
17
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information for the
periods presented. The statement of operations data of the Company presented for
the period from July 12, 1995 (inception) to December 31, 1995, the years ended
December 31, 1996 and 1997, and the balance sheet data for the years ended
December 31, 1996 and 1997 are derived from the financial statements of the
Company audited by KPMG Peat Marwick LLP, independent accountants which are
included elsewhere in this Prospectus. The report of KPMG Peat Marwick LLP on
the aforementioned financial statements contains an explanatory paragraph that
states that the Company's recurring losses from operations since inception,
working capital deficiency and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. The selected financial data of the Company presented for the six
months ended June 30, 1997 and 1998 and the balance sheet as of June 30, 1998
were derived from the Company's unaudited financial statements also appearing
herein and which, in the opinion of the Company's management, include all
adjustments, consisting of normal recurring accruals and other adjustments,
necessary for the fair presentation of the financial position and results of
operations for these periods. The results of operations for the six months ended
June 30, 1998 may not be indicative of results that may be expected for the full
year ending December 31, 1998. The financial information set forth below should
be read in conjunction with, and is qualified in its entirety by, the Financial
Statements of the Company and related notes thereto that appear elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
JULY 12,
1995
(INCEPTION)
THROUGH YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------ ---------------------------- ----------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net................................ $131,750 $ 274,755 $ 96,722 $ 49,517 $ 740,548
Cost of revenues............................. 89,359 193,653 76,598 39,385 468,591
-------- ---------- ------------ ---------- ----------
Gross profit................................. 42,391 81,102 20,124 10,132 271,957
Operating expenses:
Research and development................... -- 47,020 122,341 82,251 18,750
Selling general and administrative......... 118,986 483,612 1,399,363 741,482 512,487
Depreciation............................... 982 14,860 78,226 35,600 44,462
-------- ---------- ------------ ---------- ----------
Operating loss........................ (77,577) (464,390) (1,579,806) (849,201) (303,742)
Interest expense-net......................... -- (24,041) (130,555) (21,398) (140,015)
-------- ---------- ------------ ---------- ----------
Net loss.............................. $(77,577) $ (488,431) $ (1,710,361) $ (870,599) $ (443,757)
-------- ---------- ------------ ---------- ----------
-------- ---------- ------------ ---------- ----------
Basic and diluted net loss per share......... $ (0.20) $ (1.25) $ (3.69) $ (1.89) $ (0.95)
-------- ---------- ------------ ---------- ----------
-------- ---------- ------------ ---------- ----------
Shares used in the net loss per share
calculations(1)............................ 384,470 390,909 463,005 461,780 465,530
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -------------
1996 1997 1998(2)
---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................................................................... $ 24,059 $ 7 $ 190,310
Working capital (deficit)............................................... (158,584) (993,563) (1,148,665)
Total assets............................................................ 285,112 400,215 1,070,701
Total liabilities....................................................... 250,105 1,871,389 2,932,067
Stockholders' equity (deficit).......................................... 35,007 (1,471,174) (1,861,366)
</TABLE>
- ------------------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in per share calculations.
(2) Does not reflect the August 1998 restructuring of indebtedness and the
issuance of Common Stock, Common Stock purchase warrants and Series A
Convertible Preferred Stock in connection therewith. See Note 12 of Notes to
Financial Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Information" and the Financial Statements of the Company, including
the notes related thereto, and the other financial data appearing elsewhere in
this Prospectus.
Certain information included herein contains statements that constitute
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act. Such forward looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. Such factors include,
among others, the following: general economic and business conditions; industry
capacity; uncertainty regarding and changes in customer preferences; demographic
changes; competition; changes in methods of marketing and technology; changes in
political, social and economic conditions and regulatory factors and various
other factors beyond the Company's control. The "safe-harbor" protections
provided under the aforementioned sections of the Securities Act and the
Securities Exchange Act are not available to initial public offerings, including
this offering.
GENERAL
The Company was incorporated in July 1995. For the balance of its first
fiscal year (ended December 31, 1995), the Company was primarily engaged in
activities related to sales of videoconferencing systems and integration
services and the commencement of its operations, including establishing
relationships with suppliers and distributors. During 1996 the Company changed
its business focus and began the development of its proprietary software for use
in connection with videoconferencing systems offered by the Company, and the
implementation of its plan to offer its Video On-Demand Services. Accordingly,
the Company does not believe that its results of operations for the period from
inception through December 31, 1995 are useful as a basis for evaluating its
current or future results or that comparisons to its results of operations for
the corresponding period of fiscal 1996 would be meaningful.
During 1996, the Company continued to serve as a videoconferencing systems
integrator and began the development of its proprietary software products and
its Video On-Demand Services. The Company continued these efforts through the
end of 1997 when the Company focused its efforts on reselling, installing and
integrating videoconferencing and video streaming systems, including the
Company's proprietary software, and the sales of its Video On-Demand Services.
Accordingly, the Company operated as a development stage company until 1998 and,
has had a limited operating history on which the evaluation of the Company and
its prospects can be based.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997.
Net Revenues. Net revenues increased by $691,031 during the six months
ended June 30, 1998 compared to the six months ended June 30, 1997. This
increase was primarily due to the shift in the Company's focus from development
of its proprietary software for use in connection with videoconferencing systems
offered by the Company to sales of videoconferencing and video streaming systems
in the second half of 1997. The increase in sales relates primarily to sales of
videoconferencing systems and related equipment and services.
Gross Profits. Gross profit for the six months ended June 30, 1998 was
$271,957 compared to $10,132 for the six months ended June 30, 1997. The
increase in gross profit of $261,825 resulted from increased sales of
videoconferencing systems and related equipment and services. Gross profit as a
percentage of revenue equalled 37% for the six months ended June 30, 1998
compared to 21% for the six months ended June 30, 1997.
Research and Development. Research and development expenses decreased by
$63,501 or 77% during the six months ended June 30, 1998 compared to the six
months ended June 30, 1997. The decrease was the result of the completion of the
development of the Company's proprietary software product and management's
decision to
19
<PAGE>
concentrate its efforts on the marketing and sales of videoconferencing and
video streaming systems and the Company's Video On-Demand Services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $228,995 or 31% during the six months ended
June 30, 1998 compared to the six months ended June 30, 1997. The decrease is
primarily a result of a reduction in administrative staff as the Company
implemented its plan to reduce expenses and focus its marketing and sales
efforts on videoconferencing and video streaming systems, and its Video
On-Demand Services.
Depreciation. Depreciation expense increased by $8,862 or 25% during the
six months ended June 30, 1998 compared to the six months ended June 30, 1997.
The increase reflected the purchase of equipment associated with software
development and the continued investment in equipment required in connection
with the Company's Video On-Demand Services.
Interest Expense. Interest expense increased by $118,617 during the six
months ended June 30, 1998 compared to the six months ended June 30, 1997. The
increase was due to the Company's borrowings during 1997 and 1998 to fund
operations, develop its proprietary software and to implement its Video
On-Demand Services.
Net Loss. Net loss decreased to $443,757 for the six months ended June 30,
1998 from $870,599 for the year ended June 30, 1997, representing a decrease of
$426,842. The decrease in net loss is attributable to the factors discussed
above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Net Revenues. Net revenues decreased by $178,033 or 65% during the year
ended December 31, 1997 compared to the year ended December 31, 1996. The
decrease was primarily due to the Company's focus on software development
beginning in June 1996 and continuing through the third quarter of 1997, and the
establishment of its Video On-Demand Services during 1997.
Gross Profits. Gross profits for the year ended December 31, 1997 was
$20,124 compared to $81,102 for the year ended December 31, 1996. The decrease
in gross profit of $60,978 was due to the reduced emphasis on sales of
videoconferencing systems and related equipment and services during the year
ended December 31, 1997. Gross profit as a percentage of revenue equalled 21%
for the year ended December 31, 1997 as compared to 30% for the year ended
December 31, 1996.
Research and Development. Research and development expenses increased
$75,321 during the year ended December 31, 1997 compared to the year ended
December 31, 1996. The increase was due to the Company's efforts to develop its
software products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $915,751 during the year ended December 31,
1997 compared to the year ended December 31, 1996. The increase represented
costs associated with the marketing of the Company's proprietary software and
Video On-Demand Services and the staffing needs associated with the commencement
of its Video On-Demand Services.
Depreciation. Depreciation expense increased by $63,366 during the year
ended December 31, 1997 compared to the year ended December 31, 1996. The
increase reflects the purchase of equipment associated with the development of
the Company's proprietary software for use in connection with videoconferencing
systems offered by the Company, and the establishment of its Video On-Demand
Services.
Interest Expense. Interest expense increased by $106,514 during the year
ended December 31, 1997 compared to the year ended December 31, 1996. The
increase was primarily due to the increase in indebtedness associated with the
Company's borrowings for working capital, the development of the Company's
proprietary software for use in connection with videoconferencing systems
offered by the Company, and the implementation of its Video On-Demand Services.
Net Loss. Net loss increased to $1,710,361 for the year ended December 31,
1997 from $488,431 for the year ended December 31, 1996, representing an
increase of $1,221,930. The increase in net loss is attributable to the factors
discussed above.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Through June 30, 1998, the Company has raised approximately $2,350,000 from
the private placement of debt and equity securities. Through June 30, 1998,
$162,000 was advanced to the Company by the President of the Company. In 1996,
$600,000 of indebtedness was converted into 75,758 shares of Common Stock. In
August 1998, the Company converted $757,173 of indebtedness and accrued interest
into equity. The Company's operations generated insufficient cash flow in 1996
and thereafter to enable it to meet its capital expenditure, debt service and
other cash needs. The Company has sustained significant losses since its
inception and, as of June 30, 1998, had an accumulated deficit of $2,720,126. At
June 30, 1998, December 31, 1997 and December 31, 1996 the Company had working
capital deficits of approximately $1,148,665, $993,563 and $158,584,
respectively.
Net cash used in operating activities was $374,831 for the six months ended
June 30, 1998 and $929,265 and $389,956 for the years ended December 31, 1997
and 1996, respectively.
The Company presently has a financing agreement whereby the Company
receives purchase order financing (70% of purchase order) up to a maximum of $1
million and accounts receivable financing (85% of the invoiced amount) up to a
maximum of $2 million. The charges for monies advanced are based upon an initial
rate of 4.5% of the invoice amount for the first thirty days the invoice is
outstanding and unpaid and increases 1% for each 15 days the invoice remains
unpaid up to a maximum of 12%. The financing agreement has a term of one year
ending in March, 1999. As of June 30, 1998, the Company had secured borrowings
of $29,157 under this financing agremeent. See "Risk Factors--Possible Need for
Additional Financing." See Note 12 of Notes to Financial Statements.
In August and September, 1998, the Company conducted a restructuring of its
indebtedness. As of September 16, 1998, the Company had (i) converted $479,607
of indebtedness into 4,796 shares of Series A Convertible Preferred Stock and
issued 18,939 Common Stock purchase warrants in connection therewith; (ii)
converted $215,566 of indebtedness into 40,827 shares of Common Stock and issued
18,939 Common Stock purchase warrants in connection therewith; (iii) converted
$62,000 of indebtedness into 30,303 shares of Common Stock and cancelled 30,303
Common Stock purchase warrants in connection therewith; and (iv) restructured
$915,000 of indebtedness and issued 79,154 shares of Common Stock and cancelled
97,904 Common Stock purchase warrants in connection therewith.
The Company anticipates that it will continue to incur net operating losses
as it expands its marketing network and facilitate the business included in its
strategic plan. Cash provided by operations is not expected to be sufficient to
fund the operation, expansion and development of marketing and customer networks
and as such the Company expects to use cash on hand and the proceeds from this
Offering to fund its expansion and development.
The report of the Company's independent auditors on the Company's financial
statements as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for the period from July 12, 1995 (inception) through
December 31, 1995 and for each of the years in the two year period ended
December 31, 1997, contains an explanatory paragraph expressing substantial
doubt with respect to the ability of the Company to continue as a going concern.
The Company believes that the net proceeds from this Offering will be sufficient
to finance the Company's working capital requirements for 12 months following
the completion of the Offering. See "Use of Proceeds." There can be no assurance
that the Company will generate sufficient revenues or be able to raise
additional capital to fund its operations after such period.
YEAR 2000 COMPLIANCE
There are issues associated with the programming code in existing computer
systems as the year 2000 approaches. The "year 2000 problem" is pervasive and
complex, as virtually every computer operation will be affected in some way by
the rollover of the two-digit year value to 00. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company is in the process of
working with its software vendors to assure that the Company is prepared for the
year 2000. The Company has not verified that companies doing business with it
are year 2000 compliant. The Company does not anticipate that it will incur
significant operating expenses or be required to invest heavily in computer
systems
21
<PAGE>
improvements to be year 2000 compliant. However, significant uncertainty exists
concerning the potential costs and effects associated with year 2000 compliance.
Any year 2000 compliance problem of either the Company or its users, customers
or advertisers could have a material adverse effect on the Company's business,
result of operations and financial conditions.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1997, the Company had available net operating loss
carryforwards of approximately $1,503,169 to offset future taxable income for
federal tax purposes. The utilization of the loss carryforwards to reduce future
income taxes will depend upon the Company's ability to generate sufficient
taxable income prior to the expiration of the net operating loss carryforwards.
The carryforwards expire in the year 2003 through 2004. However, the Internal
Revenue Code of 1986, as amended, limits the maximum annual use of net operating
loss and tax credit carryforwards in certain situations where changes occur in
the stock ownership of a corporation. As a result of this Offering, a change in
ownership is likely to occur which would substantially restrict the Company's
use of the net operating loss carryforwards for federal and state income tax
purposes. See Note 8 of Notes to Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). The Company adopted the provisions of SFAS 130 in the quarter ended
March 31, 1998. SFAS No. 130 requires the Company to report its financial
statement, in addition to its net income (loss), comprehensive income (loss),
which includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. There were no differences between the Company's comprehensive
loss and its net loss as reported.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has not yet determined the
impact, if any, of adopting SOP 98-1, which will be effective for the Company's
year ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the new way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company has determined
that it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to affect the Company as the Company currently
does not have any derivative instruments or hedging activities.
22
<PAGE>
BUSINESS
The Company is a full service provider of interactive business video
communications solutions. The Company resells, installs and integrates
videoconferencing equipment and systems and video streaming software and
systems, which includes the Company's proprietary software that enables
browsing, recall and playback of digitized video content through
videoconferencing systems on an interactive basis. Additionally, the Company
records, digitizes, stores, edits and delivers or "streams" on-demand video and
audio programs over telecommunications lines and the Internet ("Video On-Demand
Services").
Real-time videoconferencing and on-demand video streaming enable more
effective and cost-efficient enterprise collaboration across disparate physical
locations. The utilization of videoconferencing and on-demand video streaming
systems has increased dramatically in the last several years due to
technological advancements, a significant decline in the costs of
videoconferencing systems and video streaming systems and an attempt by
businesses to reduce travel costs and speed the delivery of products to market.
According to TeleSpan Publishing Corporation, the combined sales revenues from
the sale and use of videoconferencing systems alone grew to $2.7 billion for the
year ended December 31, 1996.
The Company has developed strong relationships as an authorized reseller of
videoconferencing systems and video streaming systems for the established market
leaders. VCS resells a full line of videoconferencing equipment and systems for
Intel Corporation ("Intel"), PictureTel Corporation ("PictureTel") and
VideoServer, Inc. ("VideoServer"), resells video streaming systems for Starlight
Networks, Inc. ("Starlight") and RealNetworks, Inc. ("RealNetworks") and resells
video publishing software for Digital Lava, Inc. ("Digital Lava"). The Company
also provides a full range of installation, integration and support services in
connection with such systems sales. Additionally, VCS and Starlight have entered
into a joint marketing arrangement and Starlight has qualified the Company's
proprietary software for interaction with Starlight's video streaming product
line.
The Company's Video On-Demand Services enable customers to record and
digitize business meetings, training sessions or other presentations or
demonstrations on video and to retrieve the video content for later distribution
to employees, students or other end-users at different times and multiple
locations. The Company has entered into licensing agreements to provide access
to approximately 500 training tapes and believes that it is one of the leading
distributors of digitized training videotapes in the United States. In addition,
the Company's Video On-Demand Services provide customers with the ability to
edit and enhance recorded video content. The Company has supplemented its own
editing and enhancement capabilities by entering into a licensing agreement with
Digital Lava, which grants the Company's customers access to Digital Lava's
video publishing software. This video publishing software allows users to
(i) organize and manage video content and other information from diverse
sources, (ii) create links to other data and (iii) distribute the content on
CD-ROM or DVD or stream the content over intranets or the Internet.
Additionally, the Company has entered into a joint marketing arrangement with
AT&T Corp. ("AT&T"), the largest provider of videoconferencing services in the
United States, pursuant to which AT&T offers the Company's Video On-Demand
Services to all of its videoconferencing customers.
The Company's objective is to become a leading provider of interactive
video communications solutions. To achieve its objective, the Company intends to
further establish itself as a recognized reseller of videoconferencing and video
streaming systems and products by expanding its sales and marketing efforts and
to grow its Video On-Demand Services through additional joint marketing
arrangements, by expanding its library of videotapes through additional
licensing relationships, by leveraging its access to customers of
videoconferencing and video streaming systems and by incorporating new product
and technology developments as they become available.
INDUSTRY
Benefits of Interactive Video Communications
The market for interactive video communications solutions is driven in part
by demand for more effective enterprise communication and collaboration, whether
in real-time or on a stored-and-retrieved basis, among persons or groups across
disparate physical locations. Interactive video communications solutions offer
the opportunity to increase worker productivity and reduce costs by eliminating
or reducing travel. In addition to cost savings, visual collaboration reduces
the cycle time of key business processes; for example, visual collaboration
23
<PAGE>
can hasten the decision-making process by reducing the time needed to exchange
information between geographically dispersed work groups. Visual collaboration
also allows companies to leverage scarce personnel resources located at a
distance from co-workers who need their expertise.
Rapid Technological and Market Changes
Initial generations of interactive video communications solutions were
relatively expensive and typically required dedicated, high speed transmission
facilities, trained operators and special rooms. The price and performance
characteristics of these systems limited market demand to large corporations.
Despite broad market interest, cost-benefit analyses discouraged most potential
users from investing in these systems. In recent years, however, numerous
factors have led to greater acceptance and use of interactive video
communications solutions, including the rapid growth of world-wide switched
digital circuit network services, multi-media enabled PCs, improved software,
the Internet, corporate intranets, and decreasing costs of these network
services.
Switched digital networks provide increased bandwidth or capacity compared
to traditional analog telephone lines. The increased bandwidth improves the
quality of videoconferencing by significantly reducing breaks in transmission,
blurred images and instances of audio and video content being out of synch. The
recent increased availability of, and reductions in cost of, switched digital
circuit networks combined with improvements in quality offered by switched
digital circuit networks have resulted in substantial increased utilization of
videoconferencing systems and related services.
In addition, the introduction of new software decoders and quality of
service software for network routers and switches have resulted in rapid
advances in the quality of video and audio transmissions and ease of use on
packet-switched Internet Protocol ("IP") corporate intranets and the Internet.
Although the quality of videoconferencing transmissions on IP intranets and the
Internet is not at the same high level available on digital switched circuit
networks, the Company anticipates that substantial utilization of IP intranets
and the Internet and the expected growth rate in utilization of such networks
will drive continued improvement in videoconferencing related software and
hardware and the quality of videoconferencing transmissions. The Company
believes such improvements to packet-switched IP intranets and the Internet will
yield further improvements in quality of videoconferencing and video streaming
transmissions and further reductions in cost which will further increase demand
for videoconferencing systems and related services.
VIDEOCONFERENCING SYSTEMS BUSINESS
The Company is a reseller of videoconferencing systems such as digital
computer-based products manufactured by Intel and analog appliance-type (single
purpose) products manufactured by PictureTel and Polycom. The Company
anticipates a shift in the current dominance of appliance-type products to
computer-based products. In addition, the Company resells a complete range of
hardware components such as compression and decompression products ("CODECS"),
audio modules and video modules, and supporting bridges, gateways, and
peripherals such as cameras, whiteboards, audio systems, video cassette
recorders and furniture. The Company also provides installation, integration and
support services in conjunction with these sales.
Videoconferencing Systems Market
The videoconferencing systems market is highly competitive, with over 75
manufacters of video systems. The market is dominated by PictureTel and Intel.
PictureTel sells its products through resellers such as VCS and recently has
begun selling directly to end users because of the limited availability of
qualified resellers. PictureTel resellers are typically sellers of telephone
equipment (Lucent Technologies, Siemens, etc.) or audio-visual equipment, and
tend to lack specific expertise in computer-based videoconferencing. Recently,
PictureTel announced its intention to purchase Starlight as part of a strategy
to support all forms of business video communication. VCS believes it is
currently the only reseller of both PictureTel and Starlight product lines.
Intel distributes its products through established computer sales channels.
Although any firm authorized to purchase from computer wholesalers can buy
Intel's videoconferencing products, Intel has experienced difficulties in
finding qualified vendors for its videoconferencing products.
24
<PAGE>
Delivering video communication solutions requires expertise in several
areas; telephony, computer networking, acoustical systems, lighting, video
production and software development. The Company believes it is one of a limited
number of entities which has developed expertise in all these areas. Due to its
expertise, VCS has been referred frequently by Intel and PictureTel to
purchasers of videoconferencing systems.
Videoconferencing Systems Strategy
For the near term, the Company has targeted resales of videoconferencing
equipment as its major source of revenues. The Company provides customers with
turnkey solutions by consulting with them and designing systems that meet their
needs. The Company believes that due to rapidly increasing demand for
videoconferencing capabilities, the Company's expertise will provide opportunity
for the Company to realize an increase in sales volume.
The Company has established relationships with videoconferencing technology
market leaders, such as Intel and PictureTel. The Company believes that such
associations are necessary in order to establish market share in the
videoconferencing market. In addition to its relationship with Intel and
PictureTel the Company has also formed reseller relationships with system and
component manufacturers Polycom Inc., VideoServer, Inc. and SoftBoard (a
division of Microfield Graphics, Inc.). The Company also believes that such a
strategy will build brand identity and broaden the Company's customer base for
its Video On-Demand Services.
As a result of its strong relationships with Intel and PictureTel, the
Company receives marketing leads, marketing support and technical support for
the sale of their respective products.
Turnkey systems sales, as opposed to individual component sales, allows the
Company to focus its resources on generating additional sales without
undertaking the cost of building a large technical staff. In this regard, the
Company may elect to outsource the installation and maintenance of a turnkey
system to fulfill either domestic or international sales without the need to
supply its own staff members. The Company provides all customers with ongoing
technical support and services.
The Company's largest customers of videoconferencing systems and related
services, Caliber Learning Network, Inc., Reckson Associates Realty Corp., and
FactSet Research Systems Inc., accounted for 30%, 15%, and 19%, respectively, of
the Company's revenues for the six months ended June 30, 1998.
VIDEO STREAMING SYSTEMS BUSINESS
The Company is a reseller of video streaming and related software products
of Starlight and RealNetworks, encoders manufactured by Opitbase and Winnov, and
computer workstations and servers. In addition, the Company is a reseller of
video publishing software products manufactured by Digital Lava, Inc. The
Company also provides installation, integration and support services in
conjunction with these sales.
Video Streaming Systems Market
The video streaming system market is a new market experiencing rapid
growth. The first video streaming systems were introduced in 1991. Starlight
introduced its first products during 1992 and dominated the initial market by
focusing on the delivery of high quality video via intranets. In 1995, several
companies introduced streaming systems that utilized the Internet. The Internet
systems initially delivered poor quality video and were not acceptable for
business use.
According to RealNetworks, more than 30 million users have downloaded its
RealPlayer(Trademark) products to their PC's. In July, 1998, RealNetworks and
the Microsoft Corporation ("Microsoft") each introduced new streaming media
technology which substantially improves the quality of video. Microsoft is now
shipping a new Windows Media Player, which supports multiple streamed multimedia
file types, with every copy of Windows Operating System.
As in the videoconferencing market, VCS believes there is a limited number
of resellers who have developed the expertise in these areas, and VCS believes
it is one of a few resellers that offer both RealNetworks and Starlight systems
in the market. In the short term, the market for video streaming systems will
continue to
25
<PAGE>
lack qualified vendors to support this emerging market because of the
multi-discipline requirements for a successful implementation.
Video Streaming Systems Strategy
As with its videoconferencing systems operations, the Company has formed
relationships with market leaders of video streaming technology. The Company
believes that such associations are necessary in order to establish market share
in the video streaming market. In furtherance of this strategy, the Company has
entered into a joint marketing agreement with Starlight. The Company also
believes that such a strategy will build brand identity and broaden the
Company's customer base for its Video On-Demand Services.
As part of its Video On-Demand Services, the Company allows its customers
to use video streaming on a trial basis using the customers' existing
videoconferencing equipment and networks. This service gives customers an
opportunity to test the benefits of video streaming without having to first
invest in a digital system. The Company believes these trial services will
result in increased sales of video streaming systems and further broaden the
Company's customer base for its Video On-Demand Services.
VIDEO ON-DEMAND SERVICES BUSINESS
The Company provides a range of services (collectively or individually,
"Video On-Demand Services") for the recording, digitizing, storage, repurposing,
packaging and on-demand retrieval of video content. Customers of the Company's
Video On-Demand Services are typically corporations desiring to capture business
meetings and conferences or training sessions for later distribution to its
employees or customers. The Company's customers also include commercial
producers of training materials who are seeking to make their products available
in digital format.
Generally, the Company captures video content for recording by means of
direct feed from a real-time video conference, or by means of a videotape
delivered to the Company. The Company digitizes the video content to various
digital formats (MPEG-1, RealNetworks' RealMedia(Trademark), etc.) and stores
the content onto a server for subsequent retrieval by a viewer using a video
conferencing system, the Internet, intranet or locally onto a PC from a CD-ROM.
Whenever necessary, the Company provides editing and other production services
for refining the final product.
Video On-Demand Services Market
The technology development supporting the conversion of video to a digital
format, the delivery of such content to the end user and the transition of
intranet technology into an Internet delivery system, has been extremely rapid.
As a result of this transaction, the demand for knowledgeable service providers
is high. Over the course of the past year alone, over 30 new firms have entered
this servicing arena.
The initial activity in the market has been focused at the consumer arena
and has included firms such as Broadcast.com. Over 145,000 hours of content is
currently being encoded weekly. The momentum of streaming such content into an
Internet format for the business consumer is embryonic. The Company is
positioned through its Video On-Demand Services operation to take advantage of
this shift.
Video On-Demand Services Strategy
The Company's strategy is to leverage its strategic relationships with key
participants in the video conferencing arena on the one hand and the streaming
business on the other, to maintain its knowledge and service technology
advantage, to continue to expand its penetration of large corporate customers
and to leverage its background in video conferencing to grow its business as
this important technology development continues.
Additionally, the Company has entered into a joint marketing arrangement
with AT&T Corp. ("AT&T"), the largest provider of videoconferencing services in
the United States, pursuant to which AT&T offers the Company's Video On-Demand
Services to all of its videoconferencing customers.
26
<PAGE>
COMPETITION
The market for sales of products and services related to videoconferencing
and video streaming system suppliers is highly competitive and the Company
expects that competition will continue to intensify. The Company competes with
(i) videoconferencing and video streaming system suppliers, (ii) other resellers
and (iii) Internet business services providers. There can be no assurance that
the Company will be able to compete successfully or that the competitive
pressures faced by the Company, including those described below, will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Competition among providers of interactive video communication solutions,
is intense and is expected to increase significantly in the future. The Company
competes against a variety of businesses that offer videoconferencing and or
video streaming systems and related services. These companies have significantly
greater brand recognition and financial, technical, marketing and other
resources than the Company. To compete successfully, the Company must enter into
and maintain reseller relationships with major suppliers of videoconferencing
and video streaming products. The Company believes that the principal
competitive factors in attracting users include the quality of service and the
relevance, timeliness, depth and breadth of the technologies and services
offered. The Company expects competition to intensify and the number of
competitors to increase significantly in the future. In addition, as the Company
expands the scope of its products and services, it will compete directly with a
greater number of providers of interactive video communications products and
services. The operations and strategic plans of existing and future competitors
are undergoing rapid change, therefore, it is extremely difficult for the
Company to anticipate which companies are likely to offer competitive services
in the future.
The Company and its Video On-Demand Services competes with
videoconferencing and teleconferencing companies, along with companies that
provide Internet broadcasting services to businesses and other organizations.
Principal competitive factors include price, transmission quality, transmission
speed, reliability of service, ease of access, ease of use, customer support,
brand recognition and operating experience. The Company's current and potential
competitors may have significantly greater financial, technical and marketing
resources, longer operating histories and greater brand recognition. As prices
for videoconferencing and video streaming systems decrease and transmission
quality increases, the installed base of interactive video communications
systems may increase. Companies that provide media streaming software may also
enter the market for Internet broadcast services. If media streaming technology
becomes more readily available to companies at low prices, the Company may face
additional competition. In particular, local exchange carriers, ISPs and other
data communication service providers may compete in the future with a portion of
or all of the Company's Video On-Demand Services. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors for videoconferencing and video streaming products and services.
INTELLECTUAL PROPERTY MATTERS
The Company's success depends in part on its ability to protect its
intellectual property. To protect its proprietary rights, the Company relies
generally on copyright, trademark and trade secret laws, confidentiality
agreements with employees and third parties, and license agreements with
consultants, vendors and customers. The Company has not obtained a
confidentiality agreement with each customer or vendor. Despite such
protections, a third party could, without authorization, copy or otherwise
obtain and use the Company's proprietary products. There can be no assurance
that the Company's agreements with employees, consultants and others who
participate in development activities will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or independently developed by competitors.
The Company has not secured registration for its trademarks. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to the same extent as do the laws of the United States, and effective
copyright, trademark and trade secret protection may not be available in such
jurisdictions. In general, there can be no assurance that the Company's efforts
to protect its intellectual property rights through copyright, trademark and
trade secret laws will be effective to prevent misappropriation of its
intellectual property, and the
27
<PAGE>
Company's failure or inability to protect its proprietary rights could
materially adversely affect the Company's business, financial condition and
results of operations.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development efforts aimed at
improving and expanding the potential markets for its products and services.
The Company's primary focus in 1997 was development of its proprietary
software. The Company intends to develop subsequent upgrades and related
products through independent software developers.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings or claims that it
believes will have, individually or in the aggregate, a material adverse effect
on the Company's business, financial condition or results of operations.
EMPLOYEES
At August 31, 1998, the Company had 10 full-time employees, of whom 4 were
employed in sales, marketing and customer support, 2 in product research and
development, and 4 in administration and finance. The Company's success will
depend in part upon its ability to attract and retain highly skilled and
motivated personnel who are in great demand throughout the industry. None of the
Company's employees are represented by a labor union. The Company believes that
its relations with its employees are satisfactory.
FACILITIES
The Company leases space for offices in Stamford, Connecticut
(approximately 2,600 square feet) on a one year lease expiring in April 30,
1999.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information with respect to the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
William E. Wheaton III.......................... 37 Chairman of the Board, President and Chief
Executive Officer
David Russell, Jr............................... 56 Chief Financial Officer and Director
Bruce McArthur.................................. 45 Vice President of Sales and Marketing
Daniel Piergentili.............................. 38 Director
Edward E. Vahan................................. 37 Director
Scott Wheaton................................... 35 Director
</TABLE>
William E. Wheaton III, founder of the Company, has served as its Chairman
of the Board, President and Chief Executive Officer since the inception of the
Company in July, 1995. From September, 1993 to July, 1995, Mr Wheaton was the
founder and President of Interactive Conferencing Networks, which provided
satellite-based video conferencing services. From March 1992 to September, 1993,
Mr. Wheaton was General Manager of Synergy Marketing Group, a division of Boron
& LePore Associates, Inc., which produced medical educational programs. From
1985 to March, 1992, Mr. Wheaton held a position as Product Manager at Pfizer,
Inc., which provided marketing programs for Procardia XL. From 1983 to August,
1985, he held a product development position with Proctor and Gamble, where he
conducted research on health care products. Mr. Wheaton attended Worcester
Polytechnic Institute graduating with a B.S. Degree in Chemical Engineering in
June, 1983 and received an MBA Degree from New York University in May, 1989 with
a specialization in Marketing. William E. Wheaton is the brother of Scott
Wheaton.
David Russell, Jr. has been the Company's Chief Financial Officer since
March, 1998 and a Director since June, 1998. Mr. Russell, as the owner and
principal of Cove Hill Consulting, Inc., has been an independent consultant to
small emerging firms since 1990. During that time, he specialized in
infrastructure growth financing and strategic planning. He has been involved in
the securities industry since 1968, having held positions as a partner or
principal at Cowen & Co., Donaldson, Lufkin & Jenrette and Jefferies & Co. From
1981 to 1985, he founded and operated his own securities brokerage firm.
Mr. Russell attended State University of New York at Binghamton, graduating with
a BA Degree in History in 1963, and received his MBA Degree in Finance from New
York University in 1971.
Bruce McArthur has been the Company's Vice President of Sales and Marketing
since March, 1997. From April, 1990 to January, 1997, Mr. McArthur held a
position as an Account Manager at MTV Networks, where he was responsible for
developing and building accounts for advertising sales. From August of 1983, to
April, 1990 Mr. McArthur held a position as an Account Executive for television
advertising sales at Blair Television, where he was responsible for developing
and building accounts for advertising sales. Mr. McArthur attended the
University of Houston graduating with a B.A. Degree in Communications in 1978.
Daniel Piergentili has served as a Director of the Company since January,
1998. From 1998 to the present, Mr. Piergentili served as a member of the senior
staff at Qualcomm Inc. From October, 1997 to August, 1998, Mr. Piergentili was a
independent consultant for Mitec Telecom Inc. and Qualcomm Inc. From April, 1995
to October, 1997, Mr. Piergentili served as a Director of Mitec
Telecommunications. From November, 1992 to October, 1997, Mr Piergentili has
held a variety of executive positions, with Mitec Telecommunications including
Vice President of Operations, General Manager and Chief Technical Officer.
Mr. Piergentili attended Northeastern University graduating with a B.S.E.E.
Degree in Engineering in 1984.
Edward E. Vahan has served as a Director of the Company since October,
1996. Since April of 1991, Mr. Vahan has been employed by Complete Business
Solutions, Inc. (Formerly C.W. Costello & Associates) as an Information Systems
Consultant, where he is responsible for strategic technology planning, project
management and change management consulting and sales. From July, 1982 to April,
1991, Mr Vahan held a
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<PAGE>
position at Anderson Consulting, where he was responsible for project management
and technology consulting. Mr. Vahan attended Worcester Polytechnic Institute
graduating with a B.S. Degree in Management Engineering and Industrial
Engineering in 1982 .
Scott Wheaton has served as a Director of the Company since July, 1995. In
September, 1994, Mr. Wheaton founded and has served as President of Apex
Communications, Inc., a communications company with annual revenue of $20
million and over one hundred employees. For the two years prior to founding Apex
Communications, Inc., Mr. Wheaton served as a National Accounts Manager,
responsible for sales and marketing, for Boron, LePore & Associates.
Mr. Wheaton attended Worcester Polytechnic Institute graduating with a B.S.
Degree in Chemical Engineering in 1985 and received in 1992 an MBA Degree from
Drexel University with a specialization in Marketing. Scott Wheaton is the
brother of William E. Wheaton, III.
DIRECTOR COMPENSATION
Directors of the company who are not employees of the Company do not
receive any compensation for attending meetings of the Board of Directors.
Directors are reimbursed for their expenses in attending such meetings.
BOARD COMMITTEES
Audit Committee. The Company's audit committee (the "Audit Committee") is
responsible for the selection and engagement of the Company's independent
certified public accountants and for reviewing the scope of the annual audit,
audit fees, and results of the audit. The Audit Committee also reviews and
discusses with management and the Board of Directors such matters as accounting
policies and internal accounting controls, and procedures for preparation of
financial statements. The Audit Committee will consist of a majority of non-
employee directors. David Russell, Jr., Edward Vahan and Daniel Piergentili are
the members of the Audit Committee.
Compensation Committee. The Company's compensation committee (the
"Compensation Committee") approves the compensation and benefits paid to
executive employees of the Company. The Compensation Committee reviews and
recommends to the Board of Directors general policy matters relating to
compensation and benefits of employees of the Company and administers the
Company's Stock Option Plan. The Compensation Committee will consist of a
majority of non-employee directors. William E. Wheaton III, Edward Vahan and
Scott Wheaton are the members of the Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the Company's
Chief Executive Officer. No other executive officers of the Company received
total salary and bonus compensation in excess of $100,000 during the year ended
December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------------ OTHER AWARDS SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING OPTIONS
- --------------------------------------------------- ---- ----------- ----- ------------ ------------------
<S> <C> <C> <C> <C> <C>
William E. Wheaton III............................. 1997 $ 195,250(1) -- -- --
President and Chief
Executive Officer
</TABLE>
- ------------------
(1) Mr. Wheaton was paid $35,500 in cash during 1997, and he agreed to defer
$159,750. See Note 12 of Notes to Financial Statements. In September 1998,
Mr. Wheaton exchanged advances and deferred compensation owed to him in the
amount of $371,582 (inclusive of the aforementioned $159,750) for 3,716
shares of Series A Convertible Preferred Stock. See "Certain Transactions."
30
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Wheaton for a
term commencing on September 1, 1998, and ending on December 31, 2001, subject
to automatic successive one-year extensions in the absence of a notice of
termination by either the Company or Mr. Wheaton. The agreement provides for an
annual base salary of $150,000 for 1998, plus a bonus when and if agreed upon
with the Company's Compensation Committee of the Board of Directors. The
agreement has regularly scheduled increases of a minimum of 5% in such salary
through the year 2001.
The employment agreement provides that at any time within 180 days
following a Change of Control of the Company (as defined in the employment
agreement), Mr. Wheaton can terminate his agreement. Following such termination,
Mr. Wheaton is entitled to payment of compensation equal to the sum of (a) the
remaining base salary payable to Mr. Wheaton through the date on which the
employment agreement would have expired by its terms and (b) all benefits owed
to the employee under the agreement for the period of time which is the longer
of (x) the period through the date on which the employment agreement would have
expired by its terms or (y) one year.
1997 INCENTIVE STOCK OPTION PLAN
The Company's Board of Directors and stockholders have approved the Stock
Option Plan which has an initial share reserve of 284,091 shares of Common
Stock. The Stock Option Plan is administered by the Board of Directors of the
Company or the Compensation Committee. Under the Stock Option Plan, options may
be granted to employees, officers, and directors, although only employees and
directors and officers who are also employees may receive "incentive stock
options" intended to qualify for certain favorable tax treatment. The exercise
price of incentive stock options must be no less than the fair market value on
the date of grant. Options granted under the Stock Option Plan generally vest
over four years. The options terminate not more than 10 years from the date of
grant, subject to earlier termination on the optionee's death, disability or
termination of employment with the Company. Options are not assignable or
otherwise transferable except by will or the laws of descent and distribution.
LIMITATION ON LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Certificate of Incorporation includes certain
provisions permitted pursuant to the DGCL whereby officers and directors of the
Company shall be indemnified against certain liabilities to the Company or its
shareholders. The Restated Certificate of Incorporation also limits to the
fullest extent permitted by the DGCL a director's liability to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, including gross negligence, except liability for (i) breach of the
director's duty of loyalty to the Company or its shareholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of the laws, (iii) the unlawful payment of a dividend or unlawful
stock purchase or redemption and (iv) any transaction from which the director
derives an improper personal benefit. This provision of the Company's Restated
Certificate of Incorporation has no effect on the availability of equitable
remedies, such as injunction or rescission. The Company believes that these
provisions will facilitate the Company's ability to continue to attract and
retain qualified individuals to serve as directors and officers of the Company.
31
<PAGE>
CERTAIN TRANSACTIONS
During the period from June, 1996 to November, 1996, the Company issued to
Chaim Sieger (a former director of the Company) convertible promissory notes in
the principal amount of $500,000, convertible into Common Stock at a conversion
price of $7.92 per share, and 31,566 Common Stock purchase warrants exercisable
at $7.92 per share. On December 30, 1996, pursuant to a Stock Purchase Agreement
between the Company and Mr. Sieger, Mr. Sieger surrendered to the Company for
cancellation his $500,000 principal amount of convertible promissory notes and
31,566 warrants, and in exchange therefor, the Company issued to Mr. Sieger
63,144 shares of Common Stock and 6,314 Common Stock purchase warrants
exercisable at $15.84 per share.
During the period from January, 1997 through February, 1997, the Company
issued to Chaim Sieger promissory notes in the principal amount of $350,000 and,
as of June 1, 1997, 10,606 Common Stock purchase warrants exercisable at $15.84
per share. On June 1, 1997, pursuant to an oral agreement between Mr. Sieger and
the Company, these notes, together with an additional loan in the principal
amount of $250,000, were rolled into a convertible debenture in the aggregate
principal amount of $600,000. As additional consideration for this refinancing
transaction, the Company issued to Mr. Sieger 48,485 Common Stock purchase
warrants exercisable at $10.56 per share. The previously issued 10,606 warrants
were canceled upon the issuance of the new 48,485 warrants.
On September 1, 1997, the Company adjusted the exercise price of certain
outstanding warrants, including all of the warrants held by Chaim Sieger, down
to $7.92 per share.
During November, 1997, Chaim Sieger advanced the Company $25,000 of his
personal line of credit with a credit card. The Company is currently paying this
amount in monthly payments. Also in November, 1997, the Company issued to
Mr. Sieger a promissory note in principal amount of $25,000 and 5,037 Common
Stock purchase warrants exercisable at $7.92 per share.
On August 12, 1998, pursuant to a refinancing agreement between the Company
and Chaim Sieger, the $600,000 principal amount convertible debenture was rolled
into a term loan accruing interest at 14% annually. The combined principal and
interest will be paid in sixty equal monthly payments, the first payment due
(i) on the first business day of the second month following the date on which
the Company receives the IPO proceeds if the IPO occurs on or prior to
November 30, 1998; or (ii) January 15, 1999. Interest owed to Mr. Sieger accrued
as of prior to the commencement of these payments will be paid as follows:
(i) in a single lump sum cash payment made on the last business day of the month
in which the Company receives the IPO proceeds if the IPO occurs on or prior to
November 30, 1998; or (ii) in twelve equal monthly payments, the first payment
due on January 15, 1999. Additionally, the 59,836 Common Stock purchase warrants
previously issued to Mr. Sieger were exchanged for 59,836 shares of Common
Stock.
In May, July and December, 1997, the Company issued to Apex Communications,
Inc. ("Apex"), a company controlled by Scott Wheaton (a director of the Company
and a brother of William E. Wheaton III), promissory notes in exchange for loans
in the aggregate principal amount of $100,000. As additional consideration for
these loans, the Company issued 3,788 Common Stock purchase warrants exercisable
at $7.92 per share. On March 1, 1998, pursuant to a refinancing agreement
between the Company and Apex, (i) payments due on outstanding loans were
deferred; (ii) the 3,788 previously issued warrants were surrendered to the
Company for cancellation; and (iii) the Company issued 18,939 Common Stock
purchase warrants exercisable at $5.28 per share. During 1997, Apex advanced the
Company an additional $10,000. This amount has been paid. On August 31, 1998,
the combined principal amount and accrued interest owed to Apex, in the
aggregate amount of $108,025, was exchanged for 1,080 shares of Series A
Convertible Preferred Stock, and the Company issued to Apex 18,939 Common Stock
purchase warrants exercisable at $0.26 per share in exchange for the
cancellation of previously issued 18,939 Common Stock purchase warrants.
On December 1, 1997, in consideration for deferral of salary, commissions
and unreimbursed expenses, the Company issued (i) to William E. Wheaton III
(President and a director of the Company), 170,455 Common Stock purchase
warrants exercisable at $2.64 per share; (ii) to Robert Delson (a former Chief
Financial Officer of the Company), 26,515 Common Stock purchase warrants
exercisable at $7.92 per share; and (iii) to Bruce McArthur (an officer of the
Company) and another employee of the Company, 30,303 Common Stock purchase
32
<PAGE>
warrants exercisable at $13.20 per share. On January 15, 1998, the Company
issued to Robert Delson 4,924 Common Stock purchase warrants exercisable at
$7.92 per share in exchange for the cancellation of 4,924 options previously
issued to Mr. Delson under the Company's 1997 Incentive Stock Option Plan. On
August 31, 1998, the Company issued to Mr. McArthur and another employee of the
Company 30,303 shares of Common Stock in exchange for the cancellation of 30,303
warrants and forgiveness of deferred compensation and reimbursable expenses.
On December 1, 1997, the Company issued to Edward E. Vahan, a director of
the Company, as partial consideration for consulting services rendered to the
Company, 379 Common Stock purchase warrants exercisable at $7.92 per share. On
August 31, 1998, Mr. Vahan exchanged 379 Common Stock purchase warrants
exercisable at $7.92 per share for 379 Common Stock purchase warrants
exercisable at $0.26 per share.
On January 7, 1998, William E. Wheaton III (President and a director of the
Company) personally guaranteed a $100,000 principal amount convertible
promissory issued by the Company to an outside investor. This personal guarantee
was released and canceled as of September 15, 1998.
On January 15, 1998, the Company issued to Cove Hill Consulting, a company
controlled by David Russell, Chief Financial Officer and a director of the
Company, as partial compensation for consulting services rendered to the
Company, 49,242 Common Stock purchase warrants exercisable at $5.28 per share.
On August 31, 1998, Mr. Russell exchanged 49,242 Common Stock purchase warrants
exercisable at $5.28 per share for 47,727 Common Stock purchase warrants
exercisable at $0.26 per share.
On January 19, 1998, the Company issued to Daniel Piergentili, a director
of the Company, convertible promissory notes in the principal amount of
$100,000, convertible into Common Stock at a conversion price of $5.28 (subject
to adjustment), and 18,939 Common Stock purchase warrants exercisable at $5.28
per share. In August, 1998, the convertible promissory notes and accrued
interest were converted into 20,322 shares of Common Stock, and the Company
issued to Mr. Piergentili 9,470 Common Stock purchase warrants exercisable at
$0.26 per share in exchange for the cancellation of previously issued 18,939
Common Stock purchase warrants.
On September 16, 1998, advances from and deferred compensation owed to
William E. Wheaton III (President and a director of the Company) in the amount
of $371,582 was exchanged for 3,716 shares of Series A Convertible Preferred
Stock.
The Company has issued 45,454 options under its 1997 Incentive Stock Option
Plan to certain of its current directors and officers. See "Management--1997
Incentive Stock Option Plan."
Each of the transactions between the Company and each officer and
stockholder of the Company was made on terms no less favorable to the Company
and those that were available from unaffiliated third parties. All future
transactions, including loans, between the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than those that could be obtained from
unaffiliated third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 16, 1998
with respect to the beneficial ownership of the Company's Common Stock by
(i) each of the Company's directors; (ii) each of the Company's executive
officers; (iii) each person or entity who is known to the Company to
beneficially own 5% or more of the outstanding Common Stock; and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
NUMBER OF SHARES BENEFICIALLY OWNED
BENEFICIALLY ---------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) BEFORE OFFERING AFTER OFFERING
- --------------------------------------------------------------- ---------------- --------------- --------------
<S> <C> <C> <C>
William E. Wheaton III(3)...................................... 524,780 63.1% 28.6%
David Russell, Jr.(4).......................................... 47,727 7.2 2.9
Bruce McArthur(5).............................................. 28,409 4.6 1.8
Daniel Piergentili(6).......................................... 29,792 4.8 1.8
Edward E. Vahan(7)............................................. 379 * *
Chaim Sieger................................................... 122,980 19.9 7.6
Scott Wheaton(8)............................................... 31,645 4.9 1.9
Susan B. Kramer................................................ 37,879 6.1 2.3
All Directors and executive officers as a group (6 persons)
(9).......................................................... 662,732 71.5% 32.3%
</TABLE>
- ------------------
* Less than one percent
(1) The address of each person is c/o VCS Technologies, Inc., 456 Glenbrook
Road, Stamford, CT 06906.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3 of
the Securities Exchange Act of 1934, as amended. Generally, a person is
deemed to be the beneficial owner of a security if he has the right to
acquire voting or investment power within 60 days of September 16, 1998.
Except as otherwise noted, each individual or entity has sole voting and
investment power over the securities listed. Any security that any person
named above has the right to acquire within 60 days of September 16, 1998 is
deemed to be outstanding for the purposes of calculating the ownership
percentage of such person but is not deemed to be outstanding for the
purposes of calculating the ownership percentage of any other person.
(3) Includes an aggregate of 170,455 shares of Common Stock issuable pursuant to
warrants currently exercisable and 43,718 shares of Common Stock issuable
upon conversion of 3,716 shares of Series A Convertible Preferred Stock
currently convertible.
(4) Includes an aggregate of 47,727 shares of Common Stock issuable pursuant to
warrants currently exercisable held by Cove Hill Consulting, Inc., a company
controlled by Mr. Russell.
(5) Includes an aggregate of 5,682 shares of Common Stock issuable pursuant to
options currently exercisable.
(6) Includes an aggregate of 9,470 shares of Common Stock issuable pursuant to
warrants currently exercisable.
(7) Includes an aggregate of 379 shares of Common Stock issuable pursuant to
warrants currently exercisable.
(8) Includes an aggregate of 18,939 shares of Common Stock issuable pursuant to
warrants currently exercisable held by Apex Communications, Inc., a company
controlled by Mr. Wheaton, and 12,706 shares of Common Stock issuable upon
conversion of 1,080 shares of Series A Convertible Preferred Stock currently
convertible held by Apex Communications, Inc.
(9) Includes an aggregate of 246,970 shares of Common Stock issuable pursuant to
warrants currently exercisable, 5,682 shares of Common Stock issuable
pursuant to options currently exercisable, and 56,424 shares of Common Stock
issuable upon conversion of 4,796 shares of Series A Convertible Preferred
Stock which are currently convertible.
34
<PAGE>
DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to
be complete and is subject in all respects to applicable Delaware law and the
provisions of the Company's Restated Certificate of Incorporation and Bylaws and
the Underwriting Agreement between the Company and the Underwriter, copies of
all of which have been filed with the Commission as exhibits to the Registration
Statement of which this Prospectus forms a part.
COMMON STOCK
The Company's Restated Certificate of Incorporation authorizes the issuance
of up to 49,000,000 shares of Common Stock, $.001 par value per share. As of
September 16, 1998, there were 617,509 shares of Common Stock outstanding held
by 28 holders of record. Each share of Common Stock entitles the holder thereof
to one vote on each matter submitted to the stockholders of the Company. The
holders of Common Stock are entitled to receive ratable dividends, if any, as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of Company,
the holders of Common Stock are entitled to share ratable in all of the assets
of the Company available for distribution. The Common Stock has no preemptive,
subscription or conversion rights, or redemption or sinking fund provisions
applicable thereto. All outstanding shares of Common Stock are fully paid and
non-assessable. The Company has not paid any dividends on its Common Stock to
date.
SERIES A PREFERRED CONVERTIBLE STOCK
The Company's Restated Certificate of Incorporation authorizes the issuance
of up to 10,000 shares of Series A Preferred Convertible Stock, $.001 par value
per share. As of September 16, 1998, there were 4,796 shares of Series A
Preferred Convertible Stock outstanding held by two holders of record. Holders
of Series A Preferred Convertible Stock are entitled to receive cumulative
dividends at the rate of $8.50 per share per annum. No dividends (other than
stock dividends) may be paid upon any other class of stock of the Company during
such time that any accrued dividends on outstanding Series A Preferred
Convertible Stock shall remain unpaid. Holders of Series A Preferred Convertible
Stock are entitled to a liquidation preference of up to $100 per share plus
accrued and unpaid dividends. Holders have the right to convert their Series A
Preferred Convertible Stock into Common Stock at any time. The number of shares
of Common Stock issuable upon conversion is determined by multiplying the number
of shares of Series A Preferred Convertible Stock to be converted by 100 and
dividing the result by the conversion price of $8.50 per share, as such
conversion price may be adjusted from time to time for corporate
reorganizations, forward or reverse stock splits or dividends paid on the
outstanding Common Stock paid in Common Stock. The Company may elect at any time
to purchase and redeem any number of outstanding shares of Series A Preferred
Convertible Stock by paying to the holder thereof, in cash, the sum of $100 per
share plus all unpaid dividends accrued thereon. Except as otherwise provided by
law, the holders of Series A Preferred Convertible Stock shall not be entitled
to vote in any proceeding or on any matter or question at any meeting of the
Company's shareholders.
PREFERRED STOCK
In addition to the Series A Preferred Convertible Stock, the Restated
Certificate of Incorporation of the Company authorizes the issuance of up to
990,000 shares of Preferred Stock, $.001 par value per share. The Board of
Directors is authorized to issue shares of Preferred Stock from time to time in
one or more series, and, subject to the limitations contained in the Restated
Certificate of Incorporation and any limitations prescribed by law, to establish
and designate any such series and to fix the number of shares and the relative
conversion rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences. If shares of Preferred Stock with
voting rights are issued, such issuance could affect the voting rights of the
holders of the Common Stock by increasing the number of outstanding shares
having voting rights, and by the creation of class or series voting rights.
Issuance of shares of Preferred Stock could, under certain circumstances, have
the effect of delaying or preventing a change in control of the Company and may
adversely affect the rights of holders of Common Stock. Also, the Preferred
Stock could have preferences over the Common Stock (and other series of
Preferred Stock) with respect to dividends and liquidation rights.
35
<PAGE>
OPTIONS
As of the effective date of this Prospectus, the Company had granted
options to purchase 75,000 shares of Common Stock under the Stock Option Plan of
which 9,470 shares were then currently exercisable, at average or limited
exercise prices that generally range from $3.88 to $4.27. See "Management--1997
Incentive Stock Option Plan." Previous offerings under the Plans have been
exempt from registration and shares issued in connection therewith are subject
to resale restrictions. The Company intends to file a Registration Statement on
Form S-8 registering shares to be issued in connection with current and future
option grants. See "Shares Eligible for Future Sale."
WARRANTS
As of the effective date of this Prospectus, the Company has outstanding
warrants entitling the holders thereof to purchase a total of 294,318 shares of
Common Stock of the Company with exercise prices of weighted average exercise
price $1.63 per share.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION
AND BYLAWS
The Restated Certificate of Incorporation and Bylaws contain provisions
that could discourage potential takeover attempts and prevent stockholders from
changing the Company's management. The Bylaws provide that no proposal by a
stockholder shall be presented for vote at an annual meeting of stockholders
unless such stockholder shall, not later than the close of business of the last
business day of January and, with respect to a special meeting, not later than
the close of business on the fifth calendar day following the date on which
notice of the meeting is first given to stockholders, provide the Board of
Directors or the Secretary of the Company with written notice of intention to
present a proposal for action at the forthcoming meeting of stockholders, which
notice shall include the name and address of such stockholder, the number of
voting securities he or she holds of record and which he or she holds
beneficially, the text of the proposal to be presented at the meeting and a
statement in support of the proposal.
Additionally, because the Board of Directors is authorized to issue up to
990,000 shares of Preferred Stock of the Company, $.001 par value ("Preferred
Stock") and to fix the rights, preferences, privileges and restrictions,
including voting rights, of these shares without any vote or action by the
stockholders, the rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third-party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value of
the Common Stock.
LIMITATION ON LIABILITY OF DIRECTORS
The Company's Restated Certificate of Incorporation provides that a
director of the Company will not be personally liable to the Company or its
stockholders for monetary damages for the breach of his or her fiduciary duty of
care as a director. By its terms and in accordance with the DGCL, however, this
provision does not eliminate or limit the liability of a director of the Company
(i) for breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL (relating to unlawful payments of dividends or unlawful stock
repurchases or redemptions) or (iv) for any transaction from which the director
derived an improper personal benefit.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. In general Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of the Company's outstanding voting
stock) from engaging in a "business combination" (as defined in Section 203)
with the Company for three years following the date that person became an
interested stockholder unless (i) before that
36
<PAGE>
person became an interested stockholder or approved the business combination,
(ii) upon completion of the transaction that resulted in the interested
stockholder becoming an interested stockholder the interested stockholder owed
at least 85% of the voting stock of the Company outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the Company and by employee stock plans that do not provide employees with
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer) or (iii) on or following the
date of which that person became an interested stockholder, the business
combination is approved by the Company's Board and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least 66 2/3% of the
outstanding voting stock of the Company not owed by the interested stockholder.
Under Section 203, these restrictions do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors (but not less than one) who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.
Under Section 162 of the DGCL, the Board of Directors of the Company can,
without stockholders approval, issue authorized but unissued shares of Capital
Stock, which may have the effect of delaying deferring or preventing a change of
control of the Company. Except as contemplated hereby, the Company has no plan
or arrangement for the issuance of any shares of capital stock other than in the
ordinary course pursuant to the Stock Option Plan.
REGISTRATION RIGHTS
The holders of the Representative's Warrants will also have certain demand
and piggyback registration rights with respect to such warrants and the 100,000
shares of Common Stock underlying such warrants. Any exercise of the above
registration rights may hinder efforts by the Company to arrange future
financings of the Company and or have an adverse effect on the market price of
the Company's shares. See "Underwriting."
TRANSFER AGENT & REGISTRAR
Continental Stock Transfer and Trust Company, New York, New York, is the
Transfer Agent and Registrar for the Company's securities. Its telephone number
is (212) 509-4000.
37
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
1,617,509 shares of Common Stock (1,767,509 shares if the over-allotment option
is exercised in full). Of these shares, the 1,000,000 shares (1,150,000 shares
if the over-allotment option is exercised in full) offered hereby will be freely
transferable after the Offering without restriction or further registration
under the Securities Act, unless purchased by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act ("Rule 144") described
below, which will be subject to the resale limitations of Rule 144. The
remaining 617,509 shares of Common Stock will be "restricted securities" within
the meaning of Rule 144 (the "Restricted Shares") and may not be resold in a
public distribution unless they are registered under the Securities Act or are
sold pursuant to Rule 144 or another exemption from registration. All of the
Restricted Shares will be subject to lock-up agreements as described below. Such
Restricted Shares will become eligible for sale in the public market pursuant to
Rule 144 at various times commencing ninety days after the effective date of
this Prospectus, subject to the lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year (including the holding period of any prior owner except an
affiliate) is entitled to sell publicly, within any three-month period, a number
of shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (which will equal approximately 16,175
shares immediately after this Offering) or (ii) the average weekly reported
trading volume of the Common Stock during the four calendar weeks preceding the
filing of a Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an affiliate of the Company
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares to be sold for at least two years (including the holding period of
any prior owner except an affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
The Company has granted certain piggyback registration rights with respect
to an aggregate of 100,000 shares of Common Stock. See "Description of
Securities--Registration Rights" and "Underwriting."
Notwithstanding the above, all officers and directors of the Company and
all existing holders of all of the outstanding shares of Common Stock (including
shares issuable upon exercise of options) have agreed not to sell or otherwise
dispose of any shares of Common Stock without the Underwriter's prior written
consent for a period of 13 months after the effective date of the Registration
Statement of which this Prospectus forms a part. In addition, the Company has
agreed to not sell or otherwise sell any of its securities except pursuant to
the exercise of options and warrants currently outstanding without the
Underwriters' prior written consent for a period of 13 months after the
effective date of the Registration Statement of which this Prospectus forms a
part. See "Underwriting."
38
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Gilford
Securities Incorporated is acting as Representative (the "Representative"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement (the "Underwriting Agreement"), to purchase from the
Company, and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the shares of Common Stock set forth opposite their names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------------------------------------- ---------
<S> <C>
Gilford Securities Incorporated............................................................
Total...................................................................................... 1,000,000
</TABLE>
The Underwriters are committed to purchase all shares of Common Stock
offered hereby if any such shares are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to the
conditions precedent specified therein.
The Company has been advised by the Representative that it initially
proposes to offer the Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and may allow to certain dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
concessions not in excess of $ per share of Common Stock, of which amount a
sum not in excess of $ per share of Common Stock may in turn be
reallowed by such dealers to other dealers. After the commencement of the
offering, the public offering price, concessions and reallowances may be changed
by the Representative. The Representative has informed the Company that it does
not expect sales to discretionary accounts by the Underwriters to exceed five
percent of the Common Stock offered by the Company hereby.
The Company has granted to the Underwriters an option, exercisable within
45 days of the date of this Prospectus, to purchase from the Company at the
offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 150,000 shares of Common Stock on the
same terms and conditions of the Offering for the sole purpose of covering
over-allotments, if any. To the extent such option is exercised, in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional shares of Common Stock
proportionate to its initial commitment.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Representative a non-accountable expense allowance
equal to three percent of the gross proceeds derived from the sale of the shares
of Common Stock underwritten, of which $50,000 has been paid to date.
The officers and directors of the Company and all of the existing holders
of Common Stock have executed agreements pursuant to which they have agreed not
to, directly or indirectly, offer, sell, transfer, pledge, assign, hypothecate,
or otherwise encumber any shares of Common Stock or securities convertible into
shares of Common Stock for a period of thirteen months from the effective date
of the Registration Statement (the "Lock-Up Period"), without the prior written
consent of the Representative and the Company. An appropriate legend shall be
marked on the face of certificates representing all such securities. In
addition, the Company has agreed not to sell or offer for sale any of its
securities for a period of thirteen months from the effective date of the
Registration Statement without the consent of the Representative except pursuant
to options and warrants issued on the effective date of the Registration
Statement.
In connection with the Offering, the Company has agreed to issue and sell
to the Representative and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five year Representative's Warrants
(the "Representative's Warrants") to purchase 100,000 shares of Common Stock.
The Representative's Warrants are exercisable at any time during a period of
four years commencing at the beginning of the second year after their issuance
and sale at a price of $ (120% of the initial public offering price per
share of Common Stock) per share of Common Stock. The Representative's Warrants
contain anti-dilution provisions providing for adjustment of the number of
shares of Common Stock and exercise price under certain circumstances. The
Representative's Warrants grant to the holders thereof and to the holders of the
underlying securities certain rights of registration of the securities
underlying the Representative's Warrants.
39
<PAGE>
The Company has agreed that for three years from the effective date of the
Registration Statement, the Representative may designate one person for election
to the Company's Board of Directors (the "Designation Right"). In the event that
the Representative elects not to exercise its Designation Right, then it may
designate one person to attend all meetings of the Company's Board of Directors
for a period of three years. The Company has agreed to reimburse the
Representative's designee for all out-of-pocket expenses incurred in connection
with the designee's attendance at meetings of the Board of Directors.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price of the Common Stock was
determined by negotiation between the Company and the Representative. Among the
factors considered in determining such prices and terms, in addition to the
prevailing market conditions, included the history of and the prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and such other
factors that were deemed relevant. The offering price does not necessarily bear
any relationship to the assets, results of operations or net worth of the
Company.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of establishing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 150,000 shares of Common Stock, by
exercising the over-allotment option. In addition, the Representative may impose
"penalty bids" under contractual arrangements with the Underwriters, whereby it
may reclaim from an Underwriter (or dealer participating in the Offering) for
the account of other Underwriters, the selling concession with respect to Common
Stock that is distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
In connection with the Company's June, 1998 private placement of $500,000
of convertible promissory notes, the Company paid to the Representative, as
placement agent, $25,000 in cash as commissions.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
INTEREST OF NAMED EXPERTS AND COUNSEL
Moskowitz Altman & Hughes LLP, counsel to the Company, owns warrants to
purchase 18,939 shares of Common Stock at $.26 per share exercisable for a
period of five years.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the securities
being offered hereby will be passed upon for the Company by Moskowitz Altman &
Hughes LLP, New York, New York. Orrick, Herrington & Sutcliffe LLP, New York,
New York, has acted as counsel for the Underwriters in connection with the
Offering.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for the period from July 12, 1995 (inception) to December 31, 1995 and for
each of the years for the two year period ended December 31, 1997 included in
this Prospectus and elsewhere in the Registration Statement have been so
included in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere
40
<PAGE>
herein, upon authority of said firm as experts in auditing and accounting. The
report of KPMG Peat Marwick LLP on the aforementioned financial statements
contains an explanatory paragraph that states that the Company's recurring
losses from operations since inception, working capital deficiency and net
capital deficiency raise substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act relating to the Common
Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, as permitted by
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement. A copy of
the Registration Statement may be inspected by anyone without charge at the
Commission's principal office located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part thereof may be obtained from the
Public Reference Branch of the Commission upon the payment of certain fees
prescribed by the Commission. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission (http://www.sec.gov).
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish its shareholders
annual reports containing financial statements audited by its independent
auditors and to make available quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.
41
<PAGE>
VCS TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998 (unaudited)................. F-3
Consolidated Statements of Operations for the period from July 12, 1995 (inception) through December 31,
1995 and for the years ended December 31, 1996 and 1997 and for the six months ended June 30, 1997
(unaudited) and 1998 (unaudited)......................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period
from July 12, 1995 (inception) through December 31, 1995 and for the years December 31, 1996 and 1997 and
for the six months ended ended June 30, 1998 (unaudited)................................................. F-5
Consolidated Statements of Cash Flows for the period from July 12, 1995 (inception) through December 31,
1995 and for the years ended December 31, 1996 and 1997 and for the six months ended June 30, 1997
(unaudited) and June 30, 1998 (unaudited)................................................................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
VCS Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of VCS
Technologies, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the period from July 12, 1995 (inception) through
December 31, 1995 and for each of the years in the two year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VCS Technologies,
Inc. as of December 31, 1996 and 1997 and the results of its operations and its
cash flows for the period from July 12, 1995 (inception) through December 31,
1995 and for each of the years in the two year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that VCS Technologies, Inc. will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has sustained
recurring losses from operations, working capital deficiency, and has a net
capital deficiency that raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
New York, New York
August 15, 1998
F-2
<PAGE>
VCS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
ASSETS -------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash.................................................................... $ 24,059 7 190,310
Accounts receivable..................................................... 21,337 15,960 357,711
Inventory............................................................... 34,129 44,646 59,783
Prepaids and other assets............................................... 11,996 15,979 68,886
-------- ---------- -----------
Total current assets................................................. 91,521 76,592 676,690
-------- ---------- -----------
Property and equipment, at cost:
Computer equipment...................................................... 191,759 400,017 439,867
Furniture and fixtures.................................................. 17,674 17,674 17,674
-------- ---------- -----------
209,433 417,691 457,541
Less accumulated depreciation........................................... (15,842) (94,068) (138,530)
-------- ---------- -----------
Property and equipment, net.......................................... 193,591 323,623 319,011
-------- ---------- -----------
Deferred financing and offering costs..................................... -- -- 75,000
-------- ---------- -----------
Total assets......................................................... $285,112 400,215 1,070,701
======== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses................................... 96,882 506,088 841,936
Deferred compensation................................................... -- 189,278 239,289
Due to stockholder...................................................... 153,223 173,136 161,832
Notes payable, less unamortized discount of $-0-, $14,377 and $21,232... -- 175,623 556,268
Current portion of capital leases payable............................... -- 26,030 26,030
-------- ---------- -----------
Total current liabilities............................................ 250,105 1,070,155 1,825,355
Capital leases payable.................................................. -- 44,467 36,494
Notes payable; less unamortized discount of $0, $96,207, and $85,256.... -- 756,767 1,070,218
-------- ---------- -----------
Total liabilities.................................................... 250,105 1,871,389 2,932,067
-------- ---------- -----------
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 1,000,000 shares; none
issued and outstanding............................................... -- -- --
Common stock, $.001 par value. 49,000,000 shares authorized: 461,742,
465,530, and 465,530 shares issued and outstanding at December 31,
1996, 1997, and June 30, 1998, respectively.......................... 462 466 466
Paid-in capital......................................................... 600,553 804,729 858,294
Accumulated deficit..................................................... (566,008) (2,276,369) (2,720,126)
-------- ---------- -----------
Total stockholders' equity (deficit)................................. 35,007 (1,471,174) (1,861,366)
-------- ---------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity (deficit)...................... $285,112 400,215 1,070,701
======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VCS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 12,
1995 SIX MONTHS
(INCEPTION) ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------- --------------------
1995 1996 1997 1997 1998
------------ -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue, net...................................... $131,750 274,755 96,722 49,517 740,548
Cost of revenue................................... 89,359 193,653 76,598 39,385 468,591
-------- -------- ---------- -------- --------
Gross profit............................... 42,391 81,102 20,124 10,132 271,957
Operating expenses:
Research and development........................ -- 47,020 122,341 82,251 18,750
Selling, general and administrative............. 118,986 483,612 1,399,363 741,482 512,487
Depreciation.................................... 982 14,860 78,226 35,600 44,462
-------- -------- ---------- -------- --------
Operating loss............................. (77,577) (464,390) (1,579,806) (849,201) (303,742)
Interest expense, net............................. -- (24,041) (130,555) (21,398) (140,015)
-------- -------- ---------- -------- --------
Net loss................................... $(77,577) (488,431) (1,710,361) (870,599) (443,757)
======== ======== ========== ======== ========
Net loss per share--basic and diluted............. $ (0.20) (1.25) (3.69) (1.89) (0.95)
======== ======== ========== ======== ========
Weighted average number of shares outstanding..... 384,470 390,909 463,005 461,780 465,530
======== ======== ========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VCS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- -------------------
NO. OF NO. OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- -------- ------- -------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 12,
1995 (inception)................ -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock to
President and founders.......... -- -- 384,470 385 630 -- 1,015
Net loss for the period from
July 12, 1995 through
December 31, 1995............... -- -- -- -- -- (77,577) (77,577)
------- -------- ------- -------- ------- ----------- ----------
Balance at December 31, 1995...... -- -- 384,470 385 630 (77,577) (76,562)
Net loss.......................... -- -- -- -- -- (488,431) (488,431)
Conversion of notes payable to
common stock and issuance of
common stock for consulting
services........................ -- -- 77,272 77 599,923 -- 600,000
------- -------- ------- -------- ------- ----------- ----------
Balance at December 31, 1996...... -- -- 461,742 462 600,553 (566,008) 35,007
Net loss.......................... -- -- -- -- -- (1,710,361) (1,710,361)
Issuance of common stock for
consulting services............. -- -- 3,788 4 21,496 -- 21,500
Issuance of warrants in connection
with notes payable.............. -- -- -- -- 134,680 -- 134,680
Issuance of warrants for
consulting services............. -- -- -- -- 48,000 -- 48,000
------- -------- ------- -------- ------- ----------- ----------
Balance at December 31, 1997...... -- -- 465,530 466 804,729 (2,276,369) (1,471,174)
Net loss for the period
(unaudited)..................... -- -- -- -- -- (443,757) (443,757)
Issuance of warrants for
consulting services
(unaudited)..................... -- -- -- -- 10,000 -- 10,000
Issuance of warrants in connection
with notes payable
(unaudited)..................... -- -- -- -- 43,565 -- 43,565
------- -------- ------- -------- ------- ----------- ----------
Balance at June 30, 1998
(unaudited)..................... -- $ -- 465,530 $ 466 858,294 (2,720,126) (1,861,366)
======= ======== ======= ======== ======= =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VCS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JULY 12,
1995
(INCEPTION) SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------- --------------------
1995 1996 1997 1997 1998
------------ -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(77,577) (488,431) (1,710,361) (870,599) (443,757)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Depreciation................................... 982 14,860 78,226 35,600 44,462
Noncash compensation........................... -- -- 69,500 -- 10,000
Amortization of debt discounts................. -- -- 24,096 2,200 49,704
Changes in operating assets and liabilities:
Accounts receivable......................... (43,500) 22,163 5,377 8,917 (341,751)
Inventory................................... (34,067) (62) (10,517) (21,110) (15,137)
Prepaid and other assets.................... -- (11,996) (3,983) (54,387) (52,907)
Accounts payable and accrued expenses....... 42,071 54,811 409,206 260,602 335,848
Deferred compensation....................... -- -- 189,278 47,034 50,011
Due to stockholder.......................... 134,524 18,699 19,913 30,913 (11,304)
-------- -------- ---------- -------- --------
Net cash provided by (used in) operating
activities.............................. 22,433 (389,956) (929,265) (560,830) (374,831)
-------- -------- ---------- -------- --------
Cash flows from investing activities:
Capital expenditures, net.......................... (5,896) (203,537) (129,216) (168,582) (39,850)
-------- -------- ---------- -------- --------
Net cash used in investing activities..... (5,896) (203,537) (129,216) (168,582) (39,850)
-------- -------- ---------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable............ -- 600,000 1,050,000 750,000 700,000
Proceeds from loan-related party................... -- 30,000 -- -- --
Repayment of lease................................. -- -- (8,545) (1,186) (7,973)
Repayment of note.................................. -- -- (7,026) (1,408) (12,043)
Repayment of loan-related party.................... -- (30,000) -- -- --
Proceeds from issuance of common stock to President
and founders..................................... 1,015 -- -- -- --
Debt financing and offering costs.................. -- -- -- -- (75,000)
-------- -------- ---------- -------- --------
Net cash provided by financing
activities.............................. 1,015 600,000 1,034,429 747,406 604,984
-------- -------- ---------- -------- --------
Net change in cash........................ 17,552 6,507 (24,052) 17,994 190,303
Cash at beginning of period.......................... -- 17,552 24,059 24,059 7
-------- -------- ---------- -------- --------
Cash at end of period................................ $ 17,552 24,059 7 42,053 190,310
======== ======== ========== ======== ========
Supplemental disclosure of cash flow information:
Interest paid...................................... $ -- 24,041 11,093 2,084 12,943
Taxes paid......................................... $ -- 250 250 250 250
Supplemental disclosure of noncash financing
transactions:
Equipment acquired under lease..................... $ -- -- 79,042 58,872 --
Issuance of common stock to extinguish debt........ $ -- 600,000 -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JULY 12, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(1) DESCRIPTION OF BUSINESS
VCS Technologies, Inc. (the "Company"), a Delaware Corporation, was formed
in July 1995. In January 1997, the Company changed its name from VC Solutions,
Inc. to VCS Technologies, Inc. The Company is a full service provider of
interactive video communications solutions. VCS resells, installs and integrates
video conferencing equipment and systems and video streaming software and
systems, including the Company's proprietary software which enables browsing,
recall and playback of digitized video content on an interactive basis.
Additionally, the Company records, digitizes, edits, stores and delivers or
"streams" on-demand video and audio programs over telephone communications lines
and the Internet.
These consolidated financial statements include VCS Technologies, Inc. and
its wholly-owned subsidiaries: (i) VCS on Demand Service, Inc., (ii) VC
Solutions, Inc. (iii) VCS Software, Inc., and (iv) VCS Products, Inc. To date,
no business has been conducted or corporate action taken with respect to any of
these subsidiaries.
The Company was a development stage corporation through December 31, 1997
as the Company's activities consisted primarily of the development of its
products and services. The Company has incurred losses from operations since
inception. Through the development stage, management focused its resources on
selling of equipment in order to generate revenues. In addition, management has
focused on its on demand services as source of future growth. The Company is
actively pursuing additional financing. Although management believes that it can
successfully market its products and those of other vendors as well as obtain
financing, there can be no assurance that it will be able to do so. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) PROPERTY AND EQUIPMENT
Computer equipment and furniture and fixtures are stated at cost. Computer
equipment and furniture and fixtures under capital leases are stated at the
present value of minimum lease payments. Depreciation of computer equipment and
furniture and fixtures is calculated on the straight-line method over their
estimated useful lives of five and seven years, respectively. Computer equipment
and furniture and fixtures under capital leases are amortized straight line over
the shorter of the lease term or estimated useful life of the asset.
(B) INVENTORY
Inventory consists primarily of videoconferencing hardware purchased by the
Company for resale to end users. Inventories are stated at the lower of cost or
market and are determined on the first-in, first-out basis.
(C) INCOME TAXES
For the period from July 12, 1995 (inception) through December 31, 1996,
the Company had elected to be treated as a small business corporation under
Subchapter S ("S corporation") for income tax purposes and therefore was not
subject to U.S. federal income taxes. As of January 1, 1997, the Company revoked
the S corporation election and became a registered C corporation.
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities, if any, are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or
F-7
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that the tax rate change occurs.
(D) REVENUE RECOGNITION
Revenue from product sales is recognized when the product is shipped.
Revenues from services are recognized as services are performed.
(E) RESEARCH AND DEVELOPMENT
All research and development costs incurred to date have been expensed as
incurred in accordance with generally accepted accounting principles.
(F) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(G) STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
(H) INTERIM RESULTS (UNAUDITED)
The accompanying interim financial statements as of June 30, 1998 and for
the six months ended June 30, 1997 and 1998 are unaudited. In the opinion of
management, the unaudited interim consolidated financial statements have been
prepared on the same basis as the annual consolidated financial statements and
reflect all adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position as of June 30, 1998 and the
results of the Company's operations and its cash flows for the six months ended
June 30, 1997 and 1998. The financial data and other information disclosed in
these notes to consolidated financial statements related to these periods are
unaudited. The results for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998.
(I) LOSS PER SHARE
Loss per share is presented in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS 128) and
the Securities and Exchange Commission Staff Accounting Bulletin No. 98. SFAS
128 replaced the presentation of primary and fully diluted earnings (loss) per
share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128,
basic EPS excludes dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential
F-8
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the issuance of
common stock. Only basic EPS is presented as all common stock equivalents are
anti-dilutive for each of the periods presented. Anti-dilutive potential common
shares outstanding were 0, 644, and 132,211 for the period from inception
through December 31, 1995 and the years ended December 31, 1996 and 1997,
respectively, and 24,027 and 695,498 for the six-month periods ended June 30,
1997 and 1998, respectively.
(J) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended March 31, 1998. SFAS No. 130 requires the Company to report in its
financial statements, in addition to its net income (loss), comprehensive income
(loss), which includes all changes in equity during a period from non-owner
sources including, as applicable, foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. There were no differences between the Company's
comprehensive loss and its net loss as reported.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has not yet determined the
impact, if any, of adopting SOP 98-1, which will be effective for the Company's
year ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the new way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company has determined
that it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to affect the Company as the Company currently
does not have any derivative instruments or hedging activities.
(K) CONCENTRATION OF CREDIT RISK
For the period from July 12, 1995 to December 31, 1995, 3 customers
accounted for approximately 84% of revenues generated by the Company. For the
years ended December 31, 1996 and 1997, 4 and 4 customers accounted for
approximately 65% and 52% of revenues generated by the Company and 81% and 100%
of accounts receivable at December 31, 1996 and 1997, respectively. For the six
months ended June 30, 1998, three customers accounted for approximately 64% of
revenues generated by the Company and 70% of accounts receivable at June 30,
1998.
(3) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1996 and 1997 and
June 30, 1998 (unaudited) consist of the following:
F-9
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) ACCOUNTS PAYABLE AND ACCRUED EXPENSES -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------ -----------
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable..................................................... $47,008 258,774 544,739
Accrued expenses..................................................... 49,874 53,786 56,993
Accrued interest..................................................... -- 91,884 169,637
Accrued payroll...................................................... -- 101,644 70,567
------- ------- -------
Total.............................................................. $96,882 506,088 841,936
======= ======= =======
</TABLE>
(4) NOTES PAYABLE
Notes payable at December 31, 1996, December 31, 1997, and June 30, 1998
(unaudited) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- -----------
1996 1997 1998
------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Promissory notes (a)............................................... $-- 165,000 165,000
Convertible debentures (b)......................................... -- 150,000 150,000
Convertible debentures-Related party (c)........................... -- 600,000 600,000
Promissory notes--Related party (d)................................ -- 102,974 92,974
Promissory note--Related party (e)................................. -- 25,000 25,000
Convertible notes (See note 12(b))................................. -- -- 700,000
------- --------- ---------
Total notes payable................................................ -- 1,042,974 1,732,974
Less:
Current portion.................................................. -- (175,623) (556,268)
Unamortized debt discount........................................ -- (110,584) (106,488)
------- --------- ---------
Notes payable...................................................... $-- 756,767 1,070,218
======= ========= =========
</TABLE>
(A) PROMISSORY NOTES
During the period from August 1997 through September 1997, the Company
issued promissory notes in the aggregate amount of $165,000. These notes bore
interest at 12% through November 30, 1997, 14% through February 28, 1998, and
16% through July 31, 1998. The notes and all accrued interest and principal were
due on August 1, 1998 (see note 12(d)). Concurrently with the issuance of these
notes, the Company agreed to issue warrants entitling the holders to purchase a
total of 25,000 shares of common stock at an exercise price of $21.12 per share.
The warrants were to be issued quarterly beginning September 30, 1997, if the
Company did not prepay the notes on such quarterly dates. All such warrants were
exercisable during the period beginning November 1, 1997 and ending upon the
sooner of (i) November 1, 2000 or (ii) the date prior to the effective date of
the registration statement filed in connection with the Company's initial public
offering. The Company valued the warrants at $16,167, which was recorded as a
debt discount and is being amortized to interest expense over the term of the
notes.
(B) CONVERTIBLE DEBENTURES
In January and February of 1997, the Company issued notes payable totaling
$150,000. These notes were due and payable as follows: (i) the notes initially
bore interest at the rate of 12% and the Company would pay note holders all
accrued interest on March 1, 1997; (ii) thereafter, interest was to accrue at
12% through April 30,
F-10
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTES PAYABLE -- (CONTINUED)
1997; (iii) 14% through July 31, 1997; (iv) and 16%, thereafter; and (v) the
Company was to repay all accrued interest and principal in twelve equal
consecutive, monthly installments commencing September 1, 1997.
As additional consideration for the loan proceeds described above, the
Company issued to the note holders warrants to purchase 2,273 shares of common
stock at an exercise price of $15.84. Per the agreements, as the Company did not
prepay the loans on certain dates, 2,273 additional warrants to purchase shares
of common stock (at the same exercise price) were issued on May 1, 1997, August
1, 1997, November 1, 1997, and February 1, 1998.
In June 1997, the Company exchanged these notes into convertible debentures
in the principal amount of $150,000. These debentures, which are convertible at
$9.24 per common share, accrue interest at a rate of 14% per annum and both
principal and accrued interest are payable in four equal installments on
June 1, 1999, December 1, 1999, June 1, 2000 and December 1, 2000. Concurrently
with the issuance of these debentures, the Company issued warrants entitling the
holders to purchase 12,121 shares of common stock at an exercise price of $10.56
per share (subsequently reduced to $7.92 per share in September 1997) and
cancelled the previously issued warrants.
The warrants are exercisable over a five-year period. The Company valued
the warrants at $21,120, which was recorded as a debt discount and is being
amortized to interest expense over the term of the debentures. See
note 12(d) for subsequent exchange of debt.
(C) CONVERTIBLE DEBENTURES--RELATED PARTY
On various dates in January and February of 1997, the Company issued notes
to a former director payable for loans in an aggregate amount of $350,000. The
notes initially bore interest at the rate of 12%. Thereafter, interest was to
accrue at 12% through April 30, 1997; 14% through July 31, 1997; and 16%
thereafter. The Company was to pay all accrued interest to date on March 31,
1997 and all additional accrued interest and principal in twelve equal
consecutive, monthly installments commencing September 1, 1997.
As additional consideration for the loan proceeds described above, the
Company issued warrants to purchase 5,303 shares of common stock. As the Company
did not prepay the loans by certain dates, 5,303 additional warrants were issued
on May 1, 1997, August 1, 1997, November 1, 1997, and February 1, 1998. The
warrants were exercisable at $15.84 for a period of three years.
In June 1997, pursuant to an agreement between the former director and the
Company, together with $250,000 additional funding in May 1997, the Company
exchanged $600,000 of notes payable into convertible debentures in the principal
amount of $600,000. These debentures accrue interest at a rate of 14% per annum
and both principal and accrued interest are payable in four equal installments
on June 1, 1999, December 1, 1999, June 1, 2000 and December 1, 2000. The
debentures are convertible into common stock at $9.24 per share. Concurrently
with the issuance of these debentures, the Company issued new warrants entitling
the holder to purchase 48,485 shares of common stock at an exercise price of
$10.56 per share (subsequently reduced to $7.92 per share in September 1997) and
cancelled all previously issued warrants. The new warrants are exercisable over
a five-year period. The Company valued these warrants at $84,480, which was
recorded as a debt discount to the convertible debenture and is being amortized
to interest expense over the term of the debentures. See note 12(e) for
subsequent exchange of debt.
(D) PROMISSORY NOTE--RELATED PARTY
In May and July 1997, the Company issued promissory notes for loans in the
aggregate amount of $100,000 to Apex Communications, a company owned by a
director of the Company and the brother of the President of the Company. These
notes accrue interest at the rate of 14% per annum and both accrued interest and
principal are due on demand. Concurrent with the issuance of these notes,
warrants were issued entitling the holder to purchase
F-11
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTES PAYABLE -- (CONTINUED)
3,788 shares of common stock at an exercise price of $7.92 per share. The
Company valued the warrants at $8,413 which was recorded as a debt discount to
the notes payable and is being amortized over the term of the note. These
warrants are exercisable over a three year period. In December 1997, an
additional $10,000 was loaned to the Company by Apex Communications. See
note 12(b) for subsequent exchange of debt.
(E) PROMISSORY NOTE--RELATED PARTY
In November 1997, the Company issued a promissory note for a loan in the
amount of $25,000 to a former director of the Company. This note accrues
interest at the rate of 14% per annum and both accrued interest and principal
are due in August 1999. Concurrently with the issuance of this note, warrants
were issued to purchase 5,037 shares of common stock at an exercise price of
$7.92 per share. These warrants are exercisable during the period beginning in
November 1997 and ending upon the sooner of (i) November 2000, or (ii) the date
prior to the effective date of the registration statement filed in connection
with the Company's initial public offering of its common stock. The Company
valued the warrants at $4,500, which was recorded as a debt discount to the
promissory note and is being amortized over the term of the loan.
(5) SHAREHOLDERS' AGREEMENTS
The Company has agreements with (i) the holders of all the outstanding
common stock and common share purchase warrants issued pursuant to the private
placements described in footnotes 4 and 6 and (ii) the holders of all
outstanding incentive stock options as described in footnote 7, whereby, until
such time as the Company's common stock is publicly traded, all shares held by
such individuals are subject to the Company's right of first purchase. Under
these right-of-first-purchase agreements, the Company is entitled to prior
notice of any potential sale or transfer of the common stock and has the right
to purchase the stock within thirty days of such notice at a price equal to the
stock's fair market value, as defined in the right-of-first-purchase agreements.
Additionally, the Company has the right to purchase the shares held by said
individuals at fair market value, as defined, during a period of nine months
subsequent to the date of death of such individuals.
(6) COMMON STOCK TRANSACTIONS
(A) PRIVATE PLACEMENT
During 1996, the Company issued $600,000 in notes payable to a group of
independent investors. The notes bore interest at the rate of 12% per annum and
were to mature on May 1, 1997. In 1996, the Company recorded and paid $23,441 of
interest expense relating to these notes.
In December 1996, in connection with the Company's private placement
offering, the Company entered into a stock purchase agreement with each of the
aforementioned independent investors whereby each individual note holder agreed
to convert the outstanding notes due from the Company into shares of the
Company's common stock and warrants to purchase shares of common stock. In
total, the Company issued 75,758 shares of common stock and 7,576 warrants in a
noncash financing transaction in order to satisfy the $600,000 aggregate
proceeds from the offering.
The warrant exercise price is $15.84 for each share of common stock. The
warrants expire three years after the date they become exercisable but in any
event will expire on the day prior to the date the Securities and Exchange
Commission declares effective any registration statement filed in connection
with an initial public offering of the Company.
F-12
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) COMMON STOCK TRANSACTIONS -- (CONTINUED)
(B) PREFERRED AND COMMON STOCK
On December 27, 1996, the Board of Directors of the Company declared and
approved (i) an increase in the Company's authorized shares from 1,500 no par
value shares (date of inception) to 10,000,000 shares and (ii) a 1,000 for 1
stock split on its common shares. The authorized shares are comprised of 10,000
shares of preferred stock and 9,990,000 shares of common stock, each with a par
value of $.001 per share.
On September 21, 1998, the Board of Directors declared and approved an
increase in the Company's authorized shares to 50,000,000, of which (i)
49,000,000 shares are common stock (ii) 990,000 shares are preferred stock, and
(iii) 10,000 shares are Series A Convertible Preferred Stock. All stock has a
par value of $0.001.
The Board of Directors is authorized to provide for the issuance of
preferred stock in series and to establish the rights and restrictions of each
series upon issuance. The following rights and restrictions were established for
Series A Convertible Preferred Stock: (i) each share is convertible into a
number of shares of common stock determined by multiplying the number of shares
to be converted by 100 and dividing the result by 8.5, (ii) each share has a
liquidation value of $100, (iii) the Company may redeem each share at $100,
(iv) the holders of Series A Convertible Preferred Stock will receive annual
cash dividends of $8.50 per share which are cumulative and accrue from the date
of issue of the stock, and (v) the holders of Series A Convertible Preferred
Stock have no voting rights. No other series of preferred stock have been
issued.
(C) STOCK WARRANTS
Warrant activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WARRANTS EXERCISE
GRANTED PRICE
-------- --------
<S> <C> <C>
Outstanding at December 31, 1995.................................................. -- $ --
Granted........................................................................... 7,729 15.84
Exercised......................................................................... -- --
Canceled.......................................................................... -- --
--------
Outstanding at December 31, 1996.................................................. 7,729 $15.84
Granted........................................................................... 363,825 5.78
Exercised......................................................................... -- --
Canceled.......................................................................... (15,152) 15.84
--------
Outstanding at December 31, 1997.................................................. 356,402 5.57
Granted (unaudited)............................................................... 123,485 7.00
Exercised (unaudited)............................................................. -- --
Canceled (unaudited).............................................................. (3,788) 7.92
--------
Outstanding at June 30, 1998 (unaudited).......................................... 476,099 5.99
========
</TABLE>
The warrants issued during the year ended December 31, 1997 were issued at
prices ranging from $.26 to $21.12 with terms ranging from 3 to 5 years.
Professional fees totaling $48,000 and debt discounts totaling $134,680 were
recorded in connection with the issuance of warrants in 1997. Warrants issued in
the six months ended June 30, 1998 (unaudited) were at exercise prices ranging
from $5.28 to $21.12 and with terms of 3 years.
F-13
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) 1997 STOCK OPTION PLAN
In December, 1996, the Company's Board of Directors authorized an Incentive
Stock Option Plan. The Company has reserved 284,091 shares of its common stock
for issuance under the Plan. Such options shall be issued at the fair market
value of the Company's common stock on the date of the applicable grant. The
options will vest in equal annual installments over a four-year period
commencing on the grant date and expire ten years from the date of grant or in
90 days of termination of employment.
Stock option activity under the plan are summarized below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Outstanding at January 1, 1997.......................................... --
Granted................................................................. 75,757
Exercised............................................................... --
Cancelled............................................................... (22,727)
-------
Outstanding at December 31, 1997........................................ 53,030
Granted (unaudited)..................................................... 37,121
Exercised (unaudited)................................................... --
Cancelled (unaudited)................................................... (15,151)
-------
Outstanding at June 30, 1998 (unaudited)................................ 75,000
=======
</TABLE>
There were 0 and 9,470 vested options at December 31, 1997 and June 30,
1998 (unaudited), respectively. Options were granted in 1997 at exercise prices
of $7.92 and $13.20 a share. Options were granted to employees at $13.20 and
$15.84 during the six months ended June 30, 1998 (unaudited). In June 1998, the
Company amended all outstanding option agreements to change the exercise price
to $3.88 which represents the market value of the Company's stock at that time.
Options were granted to the President of the Company in June 1998 at an exercise
price $4.28.
As discussed in note 2, the Company adopted SFAS No. 123 during 1996 and
under the provisions of the statement elected not to recognize compensation
expense related to employee stock options and warrants where the exercise price
of the option or warrant equaled the fair value of the stock on the date of
grant. The Company used the Black Scholes method to determine compensation
expense based on the fair value of the options and warrants on the date of grant
in accordance with SFAS No. 123. Following are the resultant pro forma amounts
of net loss and net loss per share:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Net loss--as reported.............................................. $(488,431) (1,710,361)
Net loss--pro forma................................................ (488,431) (1,725,857)
Primary net income per share--as reported.......................... (1.25) (3.69)
Primary net income per share--pro forma............................ (1.25) (3.73)
</TABLE>
The fair value of each option and warrant granted to employees in 1997
ranged from $0.00 to $3.43 with a weighted average fair value of $.34 based on
estimates on the date of grant using the modified Black Scholes option pricing
model using the following weighted average assumptions:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Risk free interest rate................................................ 6.44%
Expected life in years................................................. 7.54 years
</TABLE>
(8) INCOME TAXES
At December 31, 1997, the Company had federal tax net loss carryforwards of
$1,503,169 expiring between the years 2003 and 2004. Section 182 of the Internal
Revenue Code imposes a limitation on the amount of tax loss carryforwards which
can be utilized in any year after there has been a 50% or greater ownership
change of
F-14
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) INCOME TAXES -- (CONTINUED)
the Company. The ownership change is based on the number of shares of stock or
the aggregate market value of the stock within any consecutive three year
period. Future years' utilization of the Company's tax loss carryforwards could
be subject to this limitation.
At December 31, 1997, the components of deferred taxes were as follows:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Deferred tax liabilities....................................... $13,654
Deferred tax assets, net of valuation allowance of $682,525.... $13,654
Net deferred taxes............................................. $ --
</TABLE>
Significant temporary differences which give rise to deferred tax (a)
assets and (b) liabilities are (a) the net operating loss carryforward and
deferred compensation, and (b) depreciation.
(9) DUE TO STOCKHOLDER
At December 31, 1996 and 1997 and June 30, 1998 (unaudited), amounts due to
the President and majority stockholder of the Company were $153,223, $173,136,
and $161,832, respectively. Deferred compensation of $-0-, $159,750, and
$209,750 was due to the President as of December 31, 1996, 1997 and June 30,
1998. Such amounts represent periodic deferral of the President's salary and
advances to the Company, all of which are non-interest bearing and may be repaid
at anytime, and from time to time, as Company resources allow. There can be no
assurance that the President will continue to provide advances or defer any
future compensation. See note 12(f) for conversion of amounts to Series A
Convertible Preferred Stock.
(10) COMMITMENTS AND CONTINGENCIES
The Company has several non-cancelable operating leases that expire over
the next three years. Future minimum lease payments under operating and capital
leases at December 31, 1997 are:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
<S> <C> <C>
1998.................................................................... $51,802 26,030
1999.................................................................... 29,162 26,030
2000.................................................................... 2,129 22,079
2001.................................................................... -- 14,236
2002.................................................................... -- 5,932
------- -------
Total................................................................... $83,093 94,327
=======
Less amount representing interest....................................... 23,830
-------
Present value of minimum capital lease payments......................... $70,497
=======
</TABLE>
Total rent expense for the period from July 12, 1995 (date of inception)
through December 31, 1995, the years ended December 31, 1996 and 1997, and the
six months ended June 30, 1997 (unaudited) and 1998 (unaudited) were $0,
$10,400, $56,912, $20,266 and $35,962, respectively.
(11) RELATED PARTY TRANSACTIONS
In November 1997, a former director advanced the Company $25,000 by the use
of his personal line of credit with a credit card. The Company is currently
making monthly payments. During the year ended December 31, 1997 and the six
months ended June 30, 1998 (unaudited), such payments were $400 and $1,255,
respectively. Such advance is included in accounts payable and accrued expenses.
At December 31, 1997, the Company has a note payable of $102,974 due to a
related party. Certain of the Company's fixed assets were pledged as collateral
to this agreement. The Company also sold equipment totaling $3,561 to the
related party at cost.
F-15
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) RELATED PARTY TRANSACTIONS -- (CONTINUED)
In December 1997, the Company granted 379 common stock purchase warrants to
a director of the Company exercisable at $7.92 per share as consideration for
consulting services provided. These warrants are exercisable during the period
from December 1, 1997 to December 31, 2000. The Company recorded compensation
expense of $1,000 as a result of using the Black Scholes model.
In December 1997, the Company granted 22,727 common stock purchase warrants
to an officer of the Company as partial consideration for deferral of salary
commissions and unreimbursed expenses. These warrants are exercisable at $13.20
per share during the period from December 1, 1997 to December 31, 2000. No value
was attributed to the warrants as a result of using the Black Scholes model, due
to the exercise price exceeding fair market value at the date of grant.
In December 1997, the Company granted 170,455 common stock purchase
warrants to the President of the Company as consideration for deferral of
salary, advances to the Company and various guarantees. These warrants are
exercisable at $2.64 per share during the period from December 1, 1997 to
December 31, 2000. No value was attributed to the warrants as a result of using
the Black Scholes model, due to the exercise price exceeding fair market value
at the date of grant.
In December 1997, the Company granted 26,515 common stock purchase warrants
to the former chief financial officer of the Company as consideration for
deferral of salary, unreimbursed expenses, and loans to the Company. These
warrants are exercisable at $7.92 per share. These warrants are exercisable upon
issuance and expire on the earlier of the day prior to the effective date of the
Company's initial public offering or the third anniversary of issuance. No value
was attributed to the warrants as a result of using the Black Scholes model, due
to the exercise price exceeding fair market value at the date of grant.
(12) SUBSEQUENT EVENTS--UNAUDITED
(A) INITIAL PUBLIC OFFERING AND REVERSE COMMON STOCK SPLIT
The Company is offering one million shares of its common stock, par value
$.001, in an Initial Public Offering (IPO) at an offering price estimated to be
between $6.00 and $7.00 per share. On September 16, 1998, the Board of Directors
declared and approved a 1 for 2.64 reverse common stock split. The accompanying
consolidated financial statements have been retroactively adjusted to reflect
this reverse common stock split.
(B) ISSUANCE OF PROMISSORY NOTES
In January 1998, the Company issued two $100,000 convertible promissory
notes to new investors. One of these notes was issued to a director of the
Company. These notes accrue interest at the rate of 12% annually and are
convertible into common stock at $5.28 per share. The principal and accrued
interest are payable on January 31, 1999. One of the notes is collateralized by
the following: (i) a security interest in the assets of the Company,
(ii) 18,939 shares of common stock owned by the President of the Company, and
(iii) the personal guarantee of the President of the Company. In addition,
the Company issued 37,879 warrants to purchase common stock at an exercise price
of $5.28 per share to the note holders. These warrants are exercisable upon
issuance and expire the earlier of the day prior to the effective date of an IPO
or five years. The Company recorded a debt discount of $22,000 related to the
valuation of these warrants which is being amortized over the life of the notes.
In March 1998, the balance of the demand note with Apex Communications,
(see note 4 (d)) a related party, totaled $92,974. This note was exchanged for
promissory notes in the same amount which accrue interest at 14% annually.
Concurrently with this exchange, all warrants associated with the demand note
were cancelled and the Company issued new warrants for 18,939 shares of common
stock at an exercise price of $5.28. These warrants are exercisable for three
years beginning March 1, 1998. The Company recorded a debt discount of $11,000
related to these warrants which is being amortized over the life of the notes.
F-16
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) SUBSEQUENT EVENTS--UNAUDITED -- (CONTINUED)
In June 1998, the Company issued convertible promissory notes in the amount
of $500,000 to four investors. The notes accrue interest at 12% annually and are
convertible into common stock at a conversion price of (i) 80% of the IPO price
or (ii) $3.88 in the event there is no IPO prior to conversion. The combined
principal and interest are due in June 2000. The Company recorded $25,000 of
deferred financing costs in connection with the issuance of these notes. The
deferred financing costs will be amortized over the life of the notes.
(C) STOCK WARRANTS
As discussed in note 4 (a), the Company is required to issue 6,250 warrants
quarterly to the holders of the $165,000 promissory notes until the notes are
repaid or June 30, 1998. As a result, the Company issued an additional 12,500
warrants and recorded an additional debt discount of $16,170 which will be
amortized over the life of the notes.
In August, 1998, the Company also granted 18,939 common stock warrants at
an exercise price of $.26 to the Company's legal counsel in exchange for 18,939
common stock warrants at an exercise price of $7.92. Legal expense totaling
$48,500 were recorded as a result of this transaction.
In August 1998, the Company issued 1,680 shares of common stock to an
outside consultant in exchange for 1,680 warrants. No proceeds were received by
the Company as a result of this transaction.
(D) RESTRUCTURE OF INDEBTEDNESS
In August, 1998, notes payable totaling $165,000 (see note 4 (a)) and
related accrued interest were rolled into a $165,000 term note which accrues
interest at 14% annually. The total principal and additional accrued interest is
due either (i) on the last business day of the month in which the Company
receives the IPO proceeds if the IPO occurs prior to November 30, 1998, or
(ii) in twelve equal monthly payments beginning January 15, 1999. In addition,
the Company issued 6,250 shares of common stock in exchange for the cancellation
of 25,000 warrants previously issued at $21.12 as a result of the above
transactions, the Company fully amortized the remaining debt discount of $7,126
associated with the original notes payable.
In August, 1998, convertible debentures totaling $150,000 (see note 4 (b))
were rolled into a term loan which accrues interest at 14% annually. The
principal and accrued interest will be paid in sixty monthly payments, the first
payment due (i) on the first business day of the second month following the date
on which the Company received the IPO proceeds if the IPO occurs on or prior to
November 30, 1998, or (ii) on January 15, 1999. In addition, the Company issued
13,068 shares of common stock in exchange for the cancellation of 13,068
warrants at an exercise price of $7.92. As a result of the above transactions,
the Company fully amortized the remaining debt discount of $16,338.
In August and September, 1998, convertible notes payable totaling $200,000
(see Note 12(b)) and accrued interest of $15,566 were converted into 40,827
shares of common stock based on a $5.28 conversion price per share. The
remaining debt discount of $11,246 associated with these notes was fully
amortized upon conversion. In addition, the Company issued 18,939 warrants at
$.26 in exchange for 37,879 warrants at $5.28. Additional expenses of $37,500
were recorded in connection with the issuance of the new warrants.
(E) RELATED PARTY TRANSACTIONS
In January 1998, the Company granted 49,242 common stock purchase warrants
to Cove Hill Consulting, Inc. (a company controlled by a director and Chief
Financial Officer of the Company) as consideration for consulting services
provided. These warrants are exercisable at $5.28 per share over a three year
period. The Company recorded consulting expenses of $10,000 as a result of this
issuance.
In August 1998, the following transactions occurred:
o The Company issued 30,303 shares of common stock to two employees in
exchange for the cancellation of 30,303 warrants and forgiveness of
deferred compensation and reimbursable expenses due to the
F-17
<PAGE>
VCS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) SUBSEQUENT EVENTS--UNAUDITED -- (CONTINUED)
employees totaling $62,000. In connection with this issuance, the Company
recorded additional compensation expenses of $66,323.
o Cove Hill Consulting, Inc. (a company controlled by the Chief Financial
Officer and a director of the Company) exchanged 49,242 common stock
purchase warrants at an exercise price of $5.28 for the issuance of
47,727 common stock purchase warrants at an exercise price of $.26 per
share. These new warrants are exercisable over a three year period. The
Company has recorded compensation expense of $129,100 for such issuance.
o Convertible Debentures in the amount of $600,000 (see note 4(c)) due to a
former director were rolled into a term loan which accrues interest at
14% annually. The principal and accrued interest will be paid in sixty
monthly payments, the first payment due (i) on the first business day of
the second month following the date which the Company received the IPO
proceeds if the IPO occurs on or prior to November 30, 1998, or (ii) on
January 15, 1999. All accrued interest shall be paid as follows: (i) on
the last business day of the month in which the Company received the IPO
proceeds if the IPO occurs on or prior to November 30, 1998, or (ii) in
twelve monthly payments, the first payment due January 15, 1999. In
addition, the Company issued 59,836 shares of common stock in exchange
for the cancellation of 59,836 common stock purchase warrants at an
exercise price of $7.92. As a result of the above transactions, the
Company fully amortized the remaining debt discount of $59,432.
o Notes payable and accrued interest to Apex Communications, a company
controlled by a director of the Company and the brother of the President
in the amount of $108,025 were exchanged for 1,080 shares of Series A
Convertible Preferred Stock. In addition, the Company cancelled 18,939
common stock purchase warrants with an exercise price of $5.28 per share
in exchange for 18,939 common stock purchase warrants with an exercise
price of $.26 per share exercisable over a period of five years. The
Company has fully amortized the remaining debt discount of $8,556 and
recorded additional expenses of $42,500 in connection with such issuance.
(F) DUE TO STOCKHOLDER
In September 1998, advances from and deferred compensation owed to the
President of the Company in the amount of $371,582 was exchanged for 3,716
shares of Series A Convertible Preferred Stock.
(G) FACTORING AGREEMENT
On March 10, 1998, the Company signed agreements with Brookridge Funding,
Inc. ("Brookridge") and Creative Capital Solutions Limited ("Creative") wherein
the Company would receive purchase order financing and accounts receivable
factoring, respectively. Under the terms of the purchase order financing
agreement with Brookridge, qualified purchase orders may be submitted for
payment advances up to 70% of the invoice amount to Original Equipment
Manufacturers in order to secure equipment for delivery to the Company's
customers. Upon delivery of equipment and the Company's submittal of an invoice
to Creative for mailing and collection. Brookridge is paid by Creative for
monies advanced. Brookridge receives a 5% fee for monies advanced. The facility
may be used for qualified customers so long as the aggregate amount of such
advances does not exceed $1 million. Under the agreement with Creative, the
Company submits its invoices for mailing and collection and may draw upon the
invoiced amounts as much as 85% of the invoice. The charges for monies advanced
are based upon an initial rate of 4.5% of the invoice amount for the first
thirty days the invoice is outstanding and unpaid and increases 1% for each
15 days the invoice remains unpaid up to a maximum of 12%. Creative has a right
to charge back to the Company advances in the event of non-payment of a customer
invoice. Maximum usage under the credit facility is $2 million. The financial
arrangements are for a period of a year and may be amended upon 60 days written
notice and cancelled by the Company without penalty. As of June 30, 1998, the
Company had secured borrowings of $29,157 under this factoring agreement.
F-18
<PAGE>
------------------------------------------------------
------------------------------------------------------
NO UNDERWRITER, DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE
INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 15
Dividend Policy................................ 15
Capitalization................................. 16
Dilution....................................... 17
Selected Financial Information................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 19
Business....................................... 23
Management..................................... 29
Certain Transactions........................... 32
Principal Stockholders......................... 34
Description of Securities...................... 35
Shares Eligible for Future Sale................ 38
Underwriting................................... 39
Interest of Named Experts and Counsel.......... 40
Legal Matters.................................. 40
Experts........................................ 40
Additional Information......................... 41
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1,000,000 SHARES
COMMON STOCK
VCS TECHNOLOGIES, INC.
(VCS LOGO)
------------------------
PROSPECTUS
------------------------
GILFORD SECURITIES INCORPORATED
, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Underwriter has agreed to indemnify the Company, its directors and each
person who controls it within the meaning of Section 15 of the Securities Act of
1933, as amended (the "Act"), with respect to any statement in or omission from
the Registration Statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Underwriter specifically for or in
connection with the preparation of the Registration Statement, the Prospectus,
or any such amendment or supplement thereto.
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with specified actions, suits or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation, a "derivative action"), if they acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
bylaws, disinterested director vote, stockholder vote, agreement or otherwise.
The Company's Restated Certificate of Incorporation eliminates the personal
liability of directors to the fullest extent permitted by Section 102(b)(7) of
the DGCL.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against any such
person in their official capacities if such person acted in good faith and in a
manner that he reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Common Stock being registered. All
amounts are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission
Registration fee............................................................. 2,374.75
NASD Filing Fee................................................................ 1,305.00
Nasdaq SmallCap Market listing fee............................................. 10,000.00
Printing and engraving expenses................................................ 60,000.00
Legal fees and expenses........................................................ 95,000.00
Accounting fees and expenses................................................... 35,000.00
Blue Sky fees and expenses..................................................... 40,000.00
Transfer agent and registrar fees.............................................. 5,000.00
Miscellaneous expenses......................................................... 1,320.25
-----------
Total................................................................ $250,000.00
-----------
-----------
</TABLE>
- ------------------
* All expenses other than the Securities and Exchange Commission Registration
Fee and the NASD Filing Fee are estimated.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, the Company has issued unregistered securities to a
limited number of persons as described below. The share information presented
has been adjusted to give effect to the 1-for-2.64 reverse stock split of the
Company's common stock approved by the Board of Directors in September, 1998.
(1) Upon the inception of the Company in July, 1995, the Company issued
384,470 shares of common stock at a subscription price of $0.001 per share. Each
of the founding shareholders was sophisticated within the meaning of the
exemption provided for by Section 4(2) of the Securities Act.
(2) Between June and November 1996, the Company issued convertible
promissory notes in the principal amount of $600,000, convertible into common
stock at a conversion price of $7.92 per share, and 37,879 common stock purchase
warrants exercisable at $7.92 per share. In December, 1996, the Company issued
75,758 shares of common stock and 7,576 common stock purchase warrants
exercisable at $15.84 per share in exchange for the cancellation of $600,000
principal amount convertible promissory notes and 37,879 common stock purchase
warrants. Each of the investors was sophisticated within the meaning of the
exemption provided for by Section 4(2) of the Securities Act.
(3) In December, 1996, the Company issued 1,515 shares of common stock and
152 common stock purchase warrants exercisable at $15.84 per share as partial
consideration for consulting services rendered to the Company. Between June and
August, 1997, the Company issued 3,788 shares of common stock and 1,212 common
stock purchase warrants exercisable at $10.56 per share as partial consideration
for consulting services rendered to the Company. In August, 1998, the Company
issued 1,680 shares of common stock in exchange for the cancellation of 1,680
common stock purchase warrants. The recipient was sophisticated within the
meaning of the exemption provided for by Section 4(2) of the Securities Act.
(4) Between January and May 1997, the Company issued promissory notes in
the principal amount of $500,000 and 15,152 common stock purchase warrants
exercisable at $15.84 per share. In June, 1997, the Company issued convertible
debentures in the principal amount of $750,000, convertible into common stock at
a conversion price of $9.24 per share, and 60,606 common share purchase warrants
exercisable at $10.56 per share, in exchange for the cancellation of $500,000
principal amount promissory notes (plus additional loans in the principal amount
of $250,000) and 15,152 common stock purchase warrants. In November, 1997, the
Company issued a promissory note in principal amount of $25,000 and 5,037 common
stock purchase warrants exercisable at $7.92 per share. In August, 1998, the
Company issued promissory notes in the principal amount of $750,000 and 72,904
shares of common stock in exchange for the cancellation of convertible
debentures in the principal amount of $750,000 and 72,904 common stock purchase
warrants. Each of the investors was sophisticated within the meaning of the
exemption provided for by Section 4(2) of the Securities Act.
(5) In July, 1997, the Company issued to an affiliate of a director
promissory notes in principal amount of $100,000 and 3,788 common stock purchase
warrants exercisable at $7.92 per share. In March, 1998, the Company issued
18,939 common stock purchase warrants exercisable at $5.28 per share in exchange
for deferral of amounts due and cancellation of 3,788 common stock purchase
warrants. In August, 1998, the Company issued 1,080 shares of Series A
Convertible Preferred Stock and 18,939 common stock purchase warrants
exercisable at $0.26 per share in exchange for forgiveness of $108,025 owed by
the Company and cancellation of previously issued 18,939 common stock purchase
warrants. The investor was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
(6) Between August and September, 1997, the Company issued promissory notes
in the principal amount of $165,000 and 25,000 common stock purchase warrants
exercisable at $21.12 per share (these warrants were issued in four quarterly
instalments, each in the aggregate amount of 16,500, the last instalment issued
on June 1, 1998). In August, 1998, the Company issued new promissory notes in
the principal amount of $165,000 and 25,000 shares of common stock in exchange
for cancellation of the previously issued promissory notes and 25,000 common
stock purchase warrants. Each of the investors was sophisticated within the
meaning of the exemption provided for by Section 4(2) of the Securities Act.
(7) In September, 1997, the Company issued to its attorneys 18,939 common
stock purchase warrants exercisable at $7.92 per share (subject to adjustment)
as partial consideration for legal services rendered to the
II-2
<PAGE>
Company. The recipient was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
(8) In November, 1997, the Company issued 18,939 common stock purchase
warrants exercisable at $0.26 per share as partial consideration for consulting
services rendered to the Company. The recipient was sophisticated within the
meaning of the exemption provided for by Section 4(2) of the Securities Act.
(9) In December, 1997, in consideration for deferral of salary, commissions
and unreimbursed expenses, the Company issued to the President and director of
the Company 170,455 common stock purchase warrants exercisable at $2.64 per
share. The recipient was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
(10) In December, 1997, in consideration for deferral of salary,
commissions and unreimbursed expenses, the Company issued to its former Chief
Financial Officer 26,515 common stock purchase warrants exercisable at $7.92 per
share. In January, 1998, the Company issued to its former Chief Financial
Officer 4,924 common stock purchase warrants exercisable at $7.92 per share in
exchange for the cancellation of 4,924 options issued under the Company's 1997
Incentive Stock Option Plan. The recipient was sophisticated within the meaning
of the exemption provided for by Section 4(2) of the Securities Act.
(11) In December, 1997, in consideration for deferral of salary,
commissions and unreimbursed expenses, the Company issued to two employees of
the Company 30,303 common stock purchase warrants exercisable at $13.20 per
share. In August, 1998, the Company issued 30,303 shares of common stock in
exchange for forgiveness of deferred salary, commissions and unreimbursed
expenses, and cancellation of 30,303 common stock purchase warrants. Each of the
recipients was sophisticated within the meaning of the exemption provided for by
Section 4(2) of the Securities Act.
(12) In December, 1997, the Company issued to a director 379 common stock
purchase warrants exercisable at $7.92 per share as partial consideration for
consulting services rendered to the Company. In August, 1998, the Company issued
379 common stock purchase warrants exercisable at $0.26 per share as
consideration for additional consulting services rendered to the Company and in
exchange for cancellation of previously issued 379 common stock purchase
warrants. The recipient was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
(13) In January, 1998, the Company issued convertible promissory notes in
the principal amount of $200,000, convertible into common stock at a conversion
price of $5.28 (subject to adjustment), and 37,879 common stock purchase
warrants exercisable at $5.28 per share. In August, 1998, the convertible
promissory notes and accrued interest were converted into 40,827 shares of
common stock, and the Company issued 18,939 common stock purchase warrants
exercisable at $0.26 per share in exchange for the cancellation of previously
issued 37,879 common stock purchase warrants. Each of the investors, one of whom
a director of the Company, was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
(14) In January, 1998, the Company issued to an affiliate of its Chief
Financial Officer and a director 49,242 common stock purchase warrants
exercisable at $5.28 per share in partial consideration for consulting services
rendered to the Company. In August, 1998, the Company issued 47,727 common stock
purchase warrants exercisable at $0.26 per share as consideration for additional
consulting services rendered to the Company and in exchange for cancellation of
previously issued 49,242 common stock purchase warrants. The recipient was
sophisticated within the meaning of the exemption provided for by
Section 4(2) of the Securities Act.
(15) In June, 1998, the Company issued convertible promissory notes in the
principal amount of $500,000, convertible into common stock at a conversion
price of (i) 80% of the Company's IPO price or (ii) $3.88 in the event there is
no IPO prior to conversion. Each of the investors was sophisticated within the
meaning of the exemption provided for by Section 4(2) of the Securities Act.
(16) In September, 1998, the Company issued 3,716 shares of Series A
Convertible Preferred Stock to the President and director of the Company in
exchange for forgiveness of advances and deferred compensation in the amount of
$371,582. The recipient was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
II-3
<PAGE>
(17) The Company has from time to time granted stock options to employees
under its Stock Option Plan in reliance upon an exemption under the Securities
Act of 1933 pursuant to Rule 701 promulgated thereunder. No shares of common
stock have been issued pursuant to option exercises.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements under
Section 4(2) of the Securities Act or Regulation D promulgated thereunder or
Rule 701 pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients in such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates or instruments issued
in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Company.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Certificate of Incorporation.
3.2 -- By-Laws.
+4.1 -- Form of Common Stock Certificate (see also Restated Certificate of Incorporation).
4.2 -- Form of Representative's Warrant Agreement, including Representative's Warrant Certificate.
4.3 -- Unsecured fixed-term Promissory Note, principal amount $600,000, dated August 12, 1998.
+5.1 -- Opinion of Moskowitz Altman & Hughes LLP.
10.1 -- Preferred Stock Purchase Agreement between William E. Wheaton, III and the Company, dated
September 16, 1998.
10.2 -- Employment Agreement, effective as of September 1, 1998, between William E. Wheaton, III and the
Company.
10.3 -- Confidentiality and Inventions Agreement between David Russell, Jr., and the Company, dated
January 16, 1998.
10.4 -- Warrant Issuance Agreement between David Russell, Jr., and the Company, dated August 31, 1998.
10.5 -- Stock Purchase Agreement between Bruce McArthur and the Company, dated August 31, 1998.
10.6 -- Investment Restructuring Agreement between Daniel Piergentili and the Company, dated August 28, 1998.
10.7 -- Warrant Issuance Agreement between Edward E. Vahan, dated August 31, 1998.
10.8 -- Investment Restructuring Agreement between Chaim Sieger and the Company, dated August 12, 1998.
10.9 -- Investment Restructuring Agreement between Apex Communications, Inc. (a company controlled by Scott
Wheaton), and the Company, dated March 31, 1998.
10.10 -- Investment Restructuring and Preferred Stock Purchase Agreement between Apex Communications, Inc. (a
company controlled by Scott Wheaton), and the Company, dated August 31, 1998.
10.11 -- Lease Agreement between 456 Glenbrook Road Associates and the Company, dated September 9, 1996.
10.12 -- Lease Modification Agreement between 456 Glenbrook Road Associates and the Company, dated June 5,
1998.
10.13 -- The Company's 1997 Incentive Stock Option Plan.
10.14 -- Form of the Company's Incentive Stock Option Agreement under the 1997 Incentive Stock Option Plan.
+10.15 -- OEM/Value Added Remarketer Agreement between VideoServer, Inc., and the Company, dated March 28,
1997.
+10.16 -- Value Added Reseller Agreement between PictureTel and the Company, dated August 29, 1997.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
+10.17 -- Marketing Agreement between AT&T and the Company, dated November 21, 1997.
+10.18 -- Master License Agreement and Starlight Product Addendum to Master License Agreement between Starlight
Networks, Inc., and the Company.
23.1 -- Consent of KPMG Peat Marwick LLP.
+23.2 -- Consent of Moskowitz Altman & Hughes LLP (included in its opinion filed as Exhibit 5.1).
+24.1 -- Power of Attorney (included on signature page).
27.1 -- Financial Data Schedule.
</TABLE>
+ to be filed by amendment.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 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 Act, treat the
information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Act as part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, treat
each post-effective amendment that contains a form of prospects as
a new registration statement relating to the securities offered
therein, and the offering of such securities at that time as the
initial bona fide offering thereof.
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 in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Act:
(ii) Reflect in the prospectus any facts or even which ,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-5
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
THE REQUIREMENTS OF FILING ON FORM SB-2 AND AUTHORIZED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE CITY OF
STAMFORD, STATE OF CONNECTICUT, ON THIS 29TH DAY OF SEPTEMBER, 1998.
VCS TECHNOLOGIES, INC.
By: /s/ William E. Wheaton III
----------------------------------
WILLIAM E. WHEATON, III
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that the persons whose signatures appear
below each severally constitutes and appoints William E. Wheaton, III as true
and lawful attorney-in-fact and agent, with full powers of substitution and
resubstitution, for them in their name, place and stead, in any and all
capacities, to sign any and all amendments (including pre-effective and
post-effective amendments) to this Registration Statement, any registration
statement relating to the same offering as this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they might or could do in
person, hereby ratifying and confirming all which said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do, or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ William E. Wheaton III
- ------------------------------------------ President, CEO and Chairman of the Board September 30, 1998
William E. Wheaton III (Principal executive
officer)
/s/ David Russell, Jr.
- ------------------------------------------ Chief Financial Officer and Director September 30,1998
David Russell, Jr. (Principal accounting officer)
/s/ Daniel Piergentili
- ------------------------------------------ Director September 30, 1998
Daniel Piergentili
/s/ Edward E. Vahan
- ------------------------------------------ Director September 30, 1998
Edward E. Vahan
/s/ Scott Wheaton
- ------------------------------------------ Director September 30, 1998
Scott Wheaton
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Certificate of Incorporation.
3.2 -- By-Laws.
+4.1 -- Form of Common Stock Certificate (see also Restated Certificate of Incorporation).
4.2 -- Form of Representative's Warrant Agreement, including Representative's Warrant Certificate.
4.3 -- Unsecured fixed-term Promissory Note, principal amount $600,000, dated August 12, 1998.
+5.1 -- Opinion of Moskowitz Altman & Hughes LLP.
10.1 -- Preferred Stock Purchase Agreement between William E. Wheaton, III and the Company, dated
September 16, 1998.
10.2 -- Employment Agreement, effective as of September 1, 1998, between William E. Wheaton, III and the
Company.
10.3 -- Confidentiality and Inventions Agreement between David Russell, Jr., and the Company, dated
January 16, 1998.
10.4 -- Warrant Issuance Agreement between David Russell, Jr., and the Company, dated August 31, 1998.
10.5 -- Stock Purchase Agreement between Bruce McArthur and the Company, dated August 31, 1998.
10.6 -- Investment Restructuring Agreement between Daniel Piergentili and the Company, dated August 28, 1998.
10.7 -- Warrant Issuance Agreement between Edward E. Vahan, dated August 31, 1998.
10.8 -- Investment Restructuring Agreement between Chaim Sieger and the Company, dated August 12, 1998.
10.9 -- Investment Restructuring Agreement between Apex Communications, Inc. (a company controlled by Scott
Wheaton), and the Company, dated March 31, 1998.
10.10 -- Investment Restructuring and Preferred Stock Purchase Agreement between Apex Communications, Inc. (a
company controlled by Scott Wheaton), and the Company, dated August 31, 1998.
10.11 -- Lease Agreement between 456 Glenbrook Road Associates and the Company, dated September 9, 1996.
10.12 -- Lease Modification Agreement between 456 Glenbrook Road Associates and the Company, dated June 5,
1998.
10.13 -- The Company's 1997 Incentive Stock Option Plan.
10.14 -- Form of the Company's Incentive Stock Option Agreement under the 1997 Incentive Stock Option Plan.
+10.15 -- OEM/Value Added Remarketer Agreement between VideoServer, Inc., and the Company, dated March 28,
1997.
+10.16 -- Value Added Reseller Agreement between PictureTel and the Company, dated August 29, 1997.
+10.17 -- Marketing Agreement between AT&T and the Company, dated November 21, 1997.
+10.18 -- Master License Agreement and Starlight Product Addendum to Master License Agreement between Starlight
Networks, Inc., and the Company.
23.1 -- Consent of KPMG Peat Marwick LLP.
+23.2 -- Consent of Moskowitz Altman & Hughes LLP (included in its opinion filed as Exhibit 5.1).
+24.1 -- Power of Attorney (included on signature page).
27.1 -- Financial Data Schedule.
</TABLE>
+ to be filed by amendment.
<PAGE>
OH&S Draft
1,000,000 Shares of Common Stock
VCS TECHNOLOGIES, INC.
UNDERWRITING AGREEMENT
New York, New York
, 1998
Gilford Securities Incorporated
As Representative of the
Several Underwriters listed
on Schedule A hereto
850 Third Avenue
New York, NY 10022
Ladies and Gentlemen:
VCS Technologies, Inc., a Delaware corporation (the "Company")
confirms its agreement with Gilford Securities Incorporated ("Gilford") and
each of the several underwriters named in Schedule A hereto (collectively, the
"Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 11) for whom Gilford is acting as
representative (in such capacity, Gilford shall hereinafter be referred to as
"you" or the "Representative"), with respect to the sale by the Company and
the purchase by the Representative of 1,000,000 shares of the Company's common
stock, $.001 par value per share ("Common Stock"). Such shares of Common Stock
are hereinafter referred to as the "Firm Shares."
Upon the Representative's request, as provided in Section 2(b) of
this Agreement, the Company shall also sell to the Underwriters up to an
additional 150,000 shares of Common Stock for the purpose of covering
over-allotments, if any (the "Option Shares"). The Firm Shares and the Option
Shares are sometimes hereinafter referred to as the "Shares." The Company also
proposes to issue and sell warrants to the Representative (the
"Representative's Warrants") pursuant to the Representative's Warrant
Agreement (the "Representative's Warrant Agreement") for the purchase of an
additional 100,000 shares of Common Stock. The shares of Common Stock issuable
upon exercise of the Representative's Warrants are hereinafter referred to as
the "Representative's Shares." The Firm Shares, the Option Shares, the
Representative's Warrants and the Representative's Shares (collectively,
hereinafter referred to as the "Securities") are more fully described in the
Registration Statement and the Prospectus referred to below.
<PAGE>
1. Representations and Warranties.
(a) The Company represents and warrants to, and agrees with, the
Representative as of the date hereof, and as of the Closing Date (hereinafter
defined) and the Option Closing Date (hereinafter defined), if any, as
follows:
(i) The Company has prepared and filed with the Securities
and Exchange Commission (the "Commission") a registration statement,
and an amendment or amendments thereto, on Form SB-2 (No. 333- ),
including any related preliminary prospectus ("Preliminary
Prospectus"), for the registration of the Firm Shares and the Option
Shares under the Securities Act of 1933, as amended (the "Act"),
which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the
Act, and the rules and regulations (the "Regulations") of the
Commission under the Act. The Company will promptly file a further
amendment to said registration statement in the form heretofore
delivered to the Representative and will not, file any other
amendment thereto to which the Representative shall have objected in
writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as
amended, on file with the Commission at the time the registration
statement becomes effective (including the prospectus, financial
statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein (including, but not limited to
those documents or information incorporated by reference therein) and
all information deemed to be a part thereof as of such time pursuant
to paragraph (b) of Rule 430(A) of the Regulations), is hereinafter
called the "Registration Statement", and the form of prospectus in
the form first filed with the Commission pursuant to Rule 424(b) of
the Regulations, is hereinafter called the "Prospectus." For purposes
hereof, "Rules and Regulations" mean the rules and regulations
adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(ii) Neither the Commission nor any state regulatory
authority has issued any order preventing or suspending the use of
any Preliminary Prospectus, the Registration Statement or the
Prospectus or any part of any thereof and no proceedings for a stop
order suspending the effectiveness of the Registration Statement or
any of the Company's securities have been instituted or are pending
or to the Company's knowledge, threatened. Each of the Preliminary
Prospectus, Registration Statement and Prospectus at the time of
filing thereof conformed with the requirements of the Act and the
Rules and Regulations, and none of the Preliminary Prospectus,
Registration Statement or Prospectus at the time of filing thereof
contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein and necessary to make
the statements therein, in light of the circumstances under which
they were made, not misleading, except that this representation and
warranty does not apply to statements made in reliance upon and in
conformity with written information furnished to the Company with
respect to the Underwriters by or on behalf of the Underwriters
expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus.
2
<PAGE>
(iii) When the Registration Statement becomes effective and
at all times subsequent thereto up to the Closing Date and each
Option Closing Date, if any, and during such longer period as the
Prospectus may be required to be delivered in connection with sales
by the Underwriters or a dealer, the Registration Statement and the
Prospectus will contain all statements which are required to be
stated therein in accordance with the Act and the Rules and
Regulations, and will conform to the requirements of the Act and the
Rules and Regulations; neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, will contain any
untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading, provided, however, that this
representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of
any Underwriters expressly for use in the Preliminary Prospectus,
Registration Statement or Prospectus or any amendment thereof or
supplement thereto.
(iv) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the
state of its incorporation. The Company does not own an interest in
any corporation, partnership, trust, joint venture or other business
entity. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of any properties or the character of its
operations requires such qualification or licensing. The Company has
all requisite corporate power and authority, and the Company has
obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar
matters), to own or lease its properties and conduct its business as
described in the Prospectus; the Company is and has been doing
business in compliance with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and all
federal, state and local laws, rules and regulations; and the Company
has not received any notice of proceedings relating to the revocation
or modification of any such authorization, approval, order, license,
certificate, franchise, or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, value, operation,
properties, business or results of operations of the Company. The
disclosures in the Registration Statement concerning the effects of
federal, state and local laws, rules and regulations on the Company's
business as currently conducted and as contemplated are correct in
all material respects and do not omit to state a material fact
necessary to make the statements contained therein not misleading in
light of the circumstances in which they were made.
(v) The Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, under
"Capitalization" and "Description of Securities" and will have the
adjusted capitalization set forth therein on the Closing Date and the
Option Closing Date, if any, based upon the assumptions set forth
therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue
any capital stock, rights, warrants, options or other securities,
3
<PAGE>
except for this Agreement, the Representative's Warrant Agreement and
as described in the Prospectus. The Securities and all other
securities issued or issuable by the Company conform or, when issued
and paid for, will conform, in all respects to all statements with
respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and
non-assessable and the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by
reason of being such holders; and none of such securities were issued
in violation of the preemptive rights of any holders of any security
of the Company or similar contractual rights granted by the Company.
The Securities are not and will not be subject to any preemptive or
other similar rights of any stockholder, have been duly authorized
and, when issued, paid for and delivered in accordance with the terms
hereof, will be validly issued, fully paid and non-assessable and
will conform to the description thereof contained in the Prospectus;
the holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities will
be in due and proper form. Upon the issuance and delivery pursuant to
the terms hereof of the Securities to be sold by the Company
hereunder, the Underwriters will acquire good and marketable title to
such Securities free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction
or equity of any kind whatsoever.
(vi) The financial statements, including the related notes
and schedules thereto, included in the Registration Statement, each
Preliminary Prospectus and the Prospectus fairly present the
financial position, income, changes in cash flow, changes in
stockholders' equity, and the results of operations of the Company at
the respective dates and for the respective periods to which they
apply and the pro forma financial information included in the
Registration Statement and Prospectus presents fairly on a basis
consistent with that of the audited financial statements included
therein, what the Company's pro forma capitalization would have been
for the respective periods and as of the respective dates to which
they apply after giving effect to the adjustments described therein.
Such financial statements have been prepared in conformity with
generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved.
There has been no adverse change or development involving a material
prospective change in the condition, financial or otherwise, or in
the earnings, position, prospects, value, operation, properties,
business, or results of operations of the Company whether or not
arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the
Prospectus and the outstanding debt, the property, both tangible and
intangible, and the business of the Company conform in all material
respects to the descriptions thereof contained in the Registration
Statement and the Prospectus. Financial information set forth in the
Prospectus under the headings "Summary Financial Information,"
"Selected Financial Data," "Capitalization," and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," fairly present, on the basis stated in the Prospectus,
the information set forth therein, have been derived from or compiled
on a basis consistent with that of the audited financial statements
included in the Prospectus.
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(vii) The Company (i) has paid all federal, state, local,
and foreign taxes for which it is liable, including, but not limited
to, withholding taxes and amounts payable under Chapters 21 through
24 of the Internal Revenue Code of 1986 (the "Code"), and has
furnished all information returns it is required to furnish pursuant
to the Code, (ii) has established adequate reserves for such taxes
which are not due and payable, and (iii) does not have any tax
deficiency or claims outstanding, proposed or assessed against it.
(viii) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (i)
the issuance by the Company of the Securities, (ii) the purchase by
the Underwriters of the Securities from the Company, (iii) the
consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (iv) resales
of the Shares in connection with the distribution contemplated
hereby.
(ix) The Company maintains insurance policies, including,
but not limited to, general liability and property insurance, which
insures the Company and its employees, against such losses and risks
generally insured against by comparable businesses. The Company (A)
has not failed to give notice or present any insurance claim with
respect to any matter, including but not limited to the Company's
business, property or employees, under the insurance policy or surety
bond in a due and timely manner, (B) does not have any disputes or
claims against any underwriter of such insurance policies or surety
bonds or has not failed to pay any premiums due and payable
thereunder, or (C) has not failed to comply with all conditions
contained in such insurance policies and surety bonds. There are no
facts or circumstances under any such insurance policy or surety bond
which would relieve any insurer of its obligation to satisfy in full
any valid claim of the Company.
(x) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or
threatened against (or circumstances that may give rise to the same),
or involving the properties or business of, the Company which (i)
questions the validity of the capital stock of the Company, this
Agreement or the Representative's Warrant Agreement or of any action
taken or to be taken by the Company pursuant to or in connection with
this Agreement or the Representative's Warrant Agreement, (ii) is
required to be disclosed in the Registration Statement which is not
so disclosed (and such proceedings as are summarized in the
Registration Statement are accurately summarized in all material
respects), or (iii) might materially and adversely affect the
condition, financial or otherwise, or the earnings, position,
prospects, stockholders' equity, value, operation, properties,
business or results of operations of the Company.
(xi) The Company has full legal right, power and authority
to authorize, issue, deliver and sell the Securities, enter into this
Agreement and the Representative's Warrant Agreement and to
consummate the transactions provided for in such agreements; and this
Agreement and the Representative's Warrant Agreement have each been
duly and properly authorized, executed and delivered by the Company.
Each
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of this Agreement and the Representative's Warrant Agreement
constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except
(i) as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or
similar laws affecting creditors' rights generally, (ii) as
enforceability of any indemnification or contribution provisions may
be limited under applicable laws or the public policies underlying
such laws and (iii) that the remedies of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which
any proceedings may be brought. None of the Company's issue and sale
of the Securities, execution or delivery of this Agreement or the
Representative's Warrant Agreement, its performance hereunder and
thereunder, its consummation of the transactions contemplated herein
and therein, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions
of, or constitutes or will constitute a default under, or result in
the creation or imposition of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of
any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of, (i) the
certificate of incorporation or by-laws of the Company, (ii) any
license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or
any other agreement or instrument to which the Company is a party or
by which it is or may be bound or to which any of its properties or
assets (tangible or intangible) is or may be subject, or any
indebtedness, or (iii) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court,
regulatory body or administrative agency or other governmental agency
or body (including, without limitation, those having jurisdiction
over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
(xii) Except as described in the Prospectus, no consent,
approval, authorization or order of, and no filing with, any court,
regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Shares pursuant to the
Prospectus and the Registration Statement, the issuance of the
Representative's Warrants, the performance of this Agreement and the
Representative's Warrant Agreement and the transactions contemplated
hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person
may have for the issue and/or sale of any of the Shares, or the
Representative's Warrants, except such as have been or may be
obtained under the Act or may be required under state securities or
Blue Sky laws in connection with the Representative's purchase and
distribution of the Shares, and the Representative's Warrants to be
sold by the Company hereunder.
(xiii) All executed agreements, contracts or other documents
or copies of executed agreements, contracts or other documents filed
as exhibits to the Registration Statement to which the Company is a
party or by which it may be bound or to which any of its assets,
properties or business may be subject have been duly and validly
authorized, executed and delivered by the Company, and constitute the
legal, valid and binding agreements of the Company, enforceable
against the Company, in
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accordance with their respective terms. The descriptions in the
Registration Statement of agreements, contracts and other documents
are accurate in all material respects and fairly present the
information required to be shown with respect thereto by Form SB-2,
and there are no contracts or other documents which are required by
the Act to be described in the Registration Statement or filed as
exhibits to the Registration Statement which are not described or
filed as required, and the exhibits which have been filed are in all
material respects complete and correct copies of the documents of
which they purport to be copies.
(xiv) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and
Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or
incurred any liability or obligation, direct or contingent, for
borrowed money, (ii) entered into any transaction other than in the
ordinary course of business, or (iii) declared or paid any dividend
or made any other distribution on or in respect of its capital stock
of any class, and there has not been any change in the capital stock,
or any material change in the debt (long or short term) or
liabilities or material adverse change in or affecting the general
affairs, management, financial operations, stockholders' equity or
results of operations of the Company.
(xv) No default exists in the due performance and observance
of any term, covenant or condition of any license, contract,
indenture, mortgage, installment sale agreement, lease, deed of
trust, voting trust agreement, stockholders agreement, partnership
agreement, note, loan or credit agreement, purchase order, or any
other agreement or instrument evidencing an obligation for borrowed
money, or any other material agreement or instrument to which the
Company is a party or by which the Company may be bound or to which
the property or assets (tangible or intangible) of the Company is
subject or affected.
(xvi) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in
compliance with all federal, state, local, and foreign laws and
regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours. There are no pending
investigations involving the Company by the U.S. Department of Labor,
or any other governmental agency responsible for the enforcement of
such federal, state, local, or foreign laws and regulations. There is
no unfair labor practice charge or complaint against the Company
pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or
threatened against or involving the Company or any predecessor
entity, and none has ever occurred. No representation question exists
respecting the employees of the Company, and no collective bargaining
agreement or modification thereof is currently being negotiated by
the Company. No grievance or arbitration proceeding is pending under
any expired or existing collective bargaining agreements of the
Company. No labor dispute with the employees of the Company exists,
or is imminent.
(xvii) Except as described in the Prospectus, the Company
does not maintain, sponsor or contribute to any program or
arrangement that is an "employee
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<PAGE>
pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1)
and 3(37), respectively, of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does
not maintain or contribute, now or at any time previously, to a
defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA
Plan (or any trust created thereunder) has engaged in a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company to any tax penalty
on prohibited transactions and which has not adequately been
corrected. Each ERISA Plan is in compliance with all reporting,
disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan. Determination letters have been
received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating
that such ERISA Plan and the attendant trust are qualified
thereunder. The Company has never completely or partially withdrawn
from a "multiemployer plan."
(xviii) Neither the Company nor any of its employees,
directors, stockholders, partners, or affiliates (within the meaning
of the Rules and Regulations) of any of the foregoing has taken or
will take, directly or indirectly, any action designed to or which
has constituted or which might be expected to cause or result in,
under the Exchange Act, or otherwise, stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Securities or otherwise.
(xix) Except as otherwise disclosed in the Prospectus, none
of the patents, patent applications, trademarks, service marks,
service names, trade names and copyrights and none of the licenses
and rights to the foregoing presently owned or held by the Company
are in dispute or are in any conflict with the right of any other
person or entity. The Company (i) owns or has the right to use, free
and clear of all liens, charges, claims, encumbrances, pledges,
security interests, defects or other restrictions or equities of any
kind whatsoever, all patents, patent applications, trademarks,
service marks, service names, trade names and copyrights, technology
and licenses and rights with respect to the foregoing, used in the
conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or
claimed right of any person, corporation or other entity under or
with respect to any of the foregoing and (ii) is not obligated or
under any liability whatsoever to make any payment by way of
royalties, fees or otherwise to any owner or licensee of, or other
claimant to, any patent, patent application, trademark, service mark,
service names, trade name, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection
with the conduct of its business or otherwise. There is no action,
suit, proceeding, inquiry, arbitration, investigation, litigation or
governmental or other proceeding, domestic or foreign, pending or
threatened (or circumstances that may give rise to the same) against
the Company which challenges the exclusive rights of the Company with
respect to any trademarks, trade names, service marks, service names,
copyrights, patents, patent applications or licenses or rights to the
foregoing used in the conduct of its business, or which challenge the
right of the Company to use any technology presently used or
contemplated to be used in the conduct of its business.
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<PAGE>
(xx) The Company owns and has the unrestricted right to use
all trade secrets, know-how (including all other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), inventions, technology, designs, processes, works of
authorship, computer programs and technical data and information
(collectively herein "intellectual property") that are material to
the development, manufacture, operation and sale of all products and
services sold or proposed to be sold by the Company, free and clear
of and without violating any right, lien, or claim of others,
including without limitation, former employers of its employees;
provided, however, that the possibility exists that other persons or
entities, completely independently of the Company, or its employees
or agents, could have developed trade secrets or items of technical
information similar or identical to those of the Company. The Company
is not aware of any such development of similar or identical trade
secrets or technical information by others.
(xxi) The Company has good and marketable title to, or valid
and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus, to be owned or leased by it free
and clear of all liens, charges, claims, encumbrances, pledges,
security interests, defects, or other restrictions or equities of any
kind whatsoever, other than those referred to in the Prospectus and
liens for taxes not yet due and payable.
(xxii) KPMG Peat Marwick LLP ("KPMG"), whose report is filed
with the Commission as a part of the Registration Statement, are
independent certified public accountants as required by the Act and
the Rules and Regulations.
(xxiii) The Company has caused to be duly executed legally
binding and enforceable agreements pursuant to which all of the
officers and directors of the Company, all holders of the Common
Stock and holders of securities exchangeable or exercisable for or
convertible into shares of Common Stock have agreed not to, directly
or indirectly, offer to sell, sell, grant any option for the sale of,
assign, transfer, pledge, hypothecate, distribute or otherwise
encumber or dispose of any shares of Common Stock or securities
convertible into, exercisable or exchangeable for or evidencing any
right to purchase or subscribe for any shares of Common Stock (either
pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein for a period of not less
than thirteen (13) months following the effective date of the
Registration Statement (except for publicly held shares of Common
Stock of the Company acquired after the effective date of the
Registration Statement in the open market and sold through Gilford)
without the prior written consent of the Representative and the
Company. The Company will cause the Transfer Agent, as defined below,
to mark an appropriate legend on the face of stock certificates
representing all of such securities and to place "stop transfer"
orders on the Company's stock ledgers.
(xxiv) Except as described in the Prospectus under
"Underwriting," there are no claims, payments, issuances,
arrangements or understandings, whether oral or written, for services
in the nature of a finder's or origination fee with respect to the
sale of the Securities hereunder or any other arrangements,
agreements, understandings, payments or issuance with respect to the
Company or any of its officers, directors,
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<PAGE>
stockholders, partners, employees or affiliates that may affect the
Underwriters' compensation, as determined by the National Association
of Securities Dealers, Inc. ("NASD").
(xxv) The Common Stock has been approved for quotation on
the Nasdaq SmallCap Market ("NSM").
(xxvi) Neither the Company nor any of its officers,
employees, agents, or any other person acting on behalf of the
Company, has, directly or indirectly, given or agreed to give any
money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, or official or
employee of any governmental agency (domestic or foreign) or
instrumentality of any government (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or
other person who was, is, or may be in a position to help or hinder
the business of the Company (or assist the Company in connection with
any actual or proposed transaction) which (a) might subject the
Company, or any other such person to any damage or penalty in any
civil, criminal or governmental litigation or proceeding (domestic or
foreign), (b) if not given in the past, might have had a materially
adverse effect on the assets, business or operations of the Company,
or (c) if not continued in the future, might adversely affect the
assets, business, operations or prospects of the Company. The
Company's internal accounting controls are sufficient to cause the
Company to comply with the Foreign Corrupt Practices Act of 1977, as
amended.
(xxvii) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under
the Rules and Regulations) of any of the foregoing persons or
entities has, either directly or indirectly, (i) an interest in any
person or entity which (A) furnishes or sells services or products
which are furnished or sold or are proposed to be furnished or sold
by the Company, or (B) purchases from or sells or furnishes to the
Company any goods or services, or (ii) a beneficial interest in any
contract or agreement to which the Company is a party or by which it
may be bound or affected. Except as set forth in the Prospectus under
"Certain Transactions," there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the
Company and any officer, director, or Principal Stockholder (as such
term is defined in the Prospectus) of the Company or any partner,
affiliate or associate of any of the foregoing persons or entities.
(xxviii) Any certificate signed by any officer of the
Company, and delivered to the Representative or to Underwriters'
Counsel (as defined herein) shall be deemed a representation and
warranty by the Company to the Representative as to the matters
covered thereby.
(xxix) The minute books of the Company have been made
available to the Representative and contain a complete summary of all
meetings and actions of the directors, stockholders, audit committee,
compensation committee and any other
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committee of the Board of Directors of the Company, respectively,
since the time of its incorporation, and reflects all transactions
referred to in such minutes accurately in all material respects.
(xxx) Except and to the extent described in the Prospectus,
no holders of any securities of the Company or of any options,
warrants or other convertible or exchangeable securities of the
Company have the right to include any securities issued by the
Company in the Registration Statement or any registration statement
to be filed by the Company or to require the Company to file a
registration statement under the Act and no person or entity holds
any anti-dilution rights with respect to any securities of the
Company.
(xxxi) The Company has as of the effective date of the
Registration Statement [(i)] entered into an employment agreement
with William Wheaton, III, in the form filed as Exhibits to the
Registration Statement [and (ii) purchased term key-man insurance on
the life of William Wheaton, III in the amount of $1,000,000, which
policy names the Company as the sole beneficiary thereof].
2. Purchase, Sale and Delivery of the Securities and Representative's
Warrants.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to each Underwriter, and each
Underwriter agrees to purchase from the Company at a price of $____ per share
[90% of the initial public offering price] of Common Stock, that number of
Firm Shares set forth in Schedule A opposite the name of such Underwriter,
subject to adjustment as the Representative in its sole discretion shall make
to eliminate any sales or purchases of fractional shares, plus any additional
number of Firm Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters to purchase all or any part of an additional 150,000 shares of
Common Stock at a price of $___ per share of Common Stock [90% of the initial
public offering price]. The option granted hereby will expire 45 days after
(i) the date the Registration Statement becomes effective, if the Company has
elected not to rely on Rule 430A under the Rules and Regulations, or (ii) the
date of this Agreement if the Company has elected to rely upon Rule 430A under
the Rules and Regulations, and may be exercised in whole or in part from time
to time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Firm Shares upon notice
by the Representative to the Company setting forth the number of Option Shares
as to which Representative is then exercising the option and the time and date
of payment and delivery for any such Option Shares. Any such time and date of
delivery (an "Option Closing Date") shall be determined by the Representative,
but shall not be later than seven full business days after the exercise of
said option, nor in any event prior to the Closing Date, as hereinafter
defined, unless otherwise agreed upon by the Representative and the Company.
Nothing herein contained shall obligate the Underwriters to make any
over-allotments. No Option Shares shall be delivered
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unless the Firm Shares shall be simultaneously delivered or shall theretofore
have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the offices of Gilford at 850 Third
Avenue, New York, New York, 10022, or at such other place as shall be agreed
upon by the Representative and the Company. Such delivery and payment shall be
made at 10:00 a.m. (New York City time) on __________, 1998 or at such other
time and date as shall be agreed upon by the Representative and the Company,
but not less than three (3) nor more than seven (7) full business days after
the effective date of the Registration Statement (such time and date of
payment and delivery being herein called "Closing Date"). In addition, in the
event that any or all of the Option Shares are purchased by the Underwriters,
payment of the purchase price for, and delivery of certificates for, such
Option Shares shall be made at the above-mentioned office of the
Representative or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates
for the Firm Shares and the Option Shares, if any, shall be made to the
Underwriters against payment by the Underwriters of the purchase price for the
Firm Shares and the Option Shares, if any, to the order of the Company for the
Firm Shares and the Option Shares, if any, by New York Clearing House funds.
Certificates for the Firm Shares and the Option Shares, if any, shall be in
definitive, fully registered form, shall bear no restrictive legends and shall
be in such denominations and registered in such names as the Representative
may request in writing at least two (2) business days prior to the Closing
Date or the relevant Option Closing Date, as the case may be. The certificates
for the Firm Shares and the Option Shares, if any, shall be made available to
the Representative at such office or such other place as the Representative
may designate for inspection, checking and packaging no later than 9:30 a.m.
on the last business day prior to Closing Date or the relevant Option Closing
Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative, Representative's Warrants at a purchase price of $.0001 per
warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 100,000 shares of Common Stock. The Representative's Warrants
shall be exercisable for a period of four years commencing one year from the
effective date of the Registration Statement at a price equaling one hundred
twenty percent (120%) of the initial public offering price of the shares of
Common Stock. The Representative's Warrant Agreement and form of Warrant
Certificate shall be substantially in the form filed as Exhibit __ to the
Registration Statement. Payment for the Representative's Warrants shall be
made on the Closing Date.
3. Public Offering of the Shares. As soon after the Registration
Statement becomes effective as the Representative deems advisable, the
Underwriters shall make a public offering of the Shares (other than to
residents of or in any jurisdiction in which qualification of the Shares is
required and has not become effective) at the price and upon the other terms
set forth in the Prospectus. The Representative may from time to time increase
or decrease the public offering price after distribution of the Shares has
been completed to such extent as the Representative, in its discretion deems
advisable. The Underwriters may enter into one of more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or
more broker-dealers who shall act as dealers in connection with such public
offering.
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4. Covenants and Agreements of the Company. The Company covenants and
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective
date of the Registration Statement, file any amendment to the Registration
Statement or supplement to the Prospectus or file any document under the Act
or Exchange Act before termination of the offering of the Shares by the
Underwriters of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the notice in writing,
(i) when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or
the threatening, of any proceeding, suspending the effectiveness of the
Registration Statement or any order preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose, (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities
for offering or sale in any jurisdiction or of the initiation, or the
threatening, of any proceeding for that purpose, (iv) of the receipt of any
comments from the Commission; and (v) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to the
Prospectus or for additional information. If the Commission or any state
securities commission authority shall enter a stop order or suspend such
qualification at any time, the Company will make every effort to obtain
promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative,
pursuant to Rule 424(b)(4)) not later than the Commission's close of business
on the earlier of (i) the second business day following the execution and
delivery of this Agreement and (ii) the fifteenth business day after the
effective date of the Registration Statement.
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Representative in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Rules and
Regulations), and will furnish the Representative with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such prospectus to
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which the Representative or Orrick, Herrington & Sutcliffe LLP ("Underwriters'
Counsel"), shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the
securities laws of such jurisdictions as the Representative may designate to
permit the continuance of sales and dealings therein for as long as may be
necessary to complete the distribution, and shall make such applications, file
such documents and furnish such information as may be required for such
purpose; provided, however, the Company shall not be required to qualify as a
foreign corporation or file a general or limited consent to service of process
in any such jurisdiction. In each jurisdiction where such qualification shall
be effected, the Company will, unless the Representative agrees that such
action is not at the time necessary or advisable, use all reasonable efforts
to file and make such statements or reports at such times as are or may
reasonably be required by the laws of such jurisdiction to continue such
qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings
in the Securities in accordance with the provisions hereof and the Prospectus,
or any amendments or supplements thereto. If at any time when a prospectus
relating to the Securities or the Representative's Shares is required to be
delivered under the Act, any event shall have occurred as a result of which,
in the opinion of counsel for the Company or Underwriters' Counsel, the
Prospectus, as then amended or supplemented, includes an untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representative promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section
10 of the Act, each such amendment or supplement to be satisfactory to
Underwriters' Counsel, and the Company will furnish to the Representative
copies of such amendment or supplement as soon as available and in such
quantities as the Representative may request.
(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such
fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Representative, an
earnings statement which will be in the detail required by, and will otherwise
comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the
Rules and Regulations, which statement need not be audited unless required by
the Act, covering a period of at least 12 consecutive months after the
effective date of the Registration Statement.
(h) During a period of seven years after the date hereof, the Company
will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements
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audited by independent public accountants) and unaudited quarterly reports of
earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly reports to
its stockholders, statements of income of the Company for each
quarter in the form furnished to the Company's stockholders and
certified by the Company's principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate 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,
the NASD or any securities exchange;
(v) every press release and every material news item or
article of interest to the financial community in respect of the
Company, or its affairs which was released or prepared by or on
behalf of the Company; and
(vi) any additional information of a public nature
concerning the Company (and any future subsidiary) or its businesses
which the Representative may request.
(vii) During such seven-year period, if the Company has an
active subsidiary, the foregoing financial statements will be on a
consolidated basis to the extent that the accounts of the Company and
its subsidiary are consolidated, and will be accompanied by similar
financial statements for any significant subsidiary which is not so
consolidated.
(i) The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.
(j) The Company will furnish to the Representative or on
Representative's order, without charge, at such place as the Representative
may designate, copies of each Preliminary Prospectus, the Registration
Statement and any pre-effective or post-effective amendments thereto (two of
which copies will be signed and will include all financial statements and
exhibits), the Prospectus, and all amendments and supplements thereto,
including any prospectus prepared after the effective date of the Registration
Statement, in each case as soon as available and in such quantities as the
Representative may request.
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(k) On or before the effective date of the Registration Statement,
the Company shall provide the Representative with true copies of duly
executed, legally binding and enforceable agreements pursuant to which for a
period of thirteen (13) months from the effective date of the Registration
Statement, the officers and directors of the Company, holders of all shares of
Common Stock and holders of securities exchangeable or exercisable for or
convertible into shares of Common Stock, agree that it or he or she will not
directly or indirectly, issue, offer to sell, sell, grant an option for the
sale of, assign, transfer, pledge, hypothecate, distribute or otherwise
encumber or dispose of any shares of Common Stock or securities convertible
into, exercisable or exchangeable for or evidencing any right to purchase or
subscribe for any shares of Common Stock (either pursuant to Rule 144 of the
Rules and Regulations or otherwise) or dispose of any beneficial interest
therein without the prior written consent of the Representative and the
Company (collectively, the "Lock-up Agreements"). During the thirteen (13)
month period commencing with the effective date of the Registration Statement,
the Company shall not, without the prior written consent of the
Representative, sell, contract or offer to sell, issue, transfer, assign,
pledge, hypothecate, distribute, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any options, rights or warrants with
respect to any shares of Common Stock, except as set forth in clause(s) of
Section 4 hereof. On or before the Closing Date, the Company shall deliver
instructions to the Transfer Agent authorizing it to place appropriate legends
on the certificates representing the securities subject to the Lock-up
Agreements and to place appropriate stop transfer orders on the Company's
ledgers.
(l) Neither the Company, nor any of its officers, directors,
stockholders, nor any of their respective affiliates (within the meaning of
the Rules and Regulations) will take, directly or indirectly, any action
designed to, or which might in the future reasonably be expected to cause or
result in, stabilization or manipulation of the price of any securities of the
Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use
of Proceeds" in the Prospectus. Except as described in the Prospectus, no
portion of the net proceeds will be used, directly or indirectly, to acquire
any securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may
be required pursuant to Rule 463 under the Act) from time to time, under the
Act, the Exchange Act, and the Rules and Regulations, and all such reports,
forms and documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the Rules and
Regulations.
(o) The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in its letter to be
furnished pursuant to Section 6(j) hereof.
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<PAGE>
(p) The Company shall use cause the Common Stock to be quoted on NSM
and for a period of seven (7) years from the date hereof, use its best efforts
to maintain the NSM quotation of the Common Stock to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representative at the Representative's request and at the
Company's sole expense, (i) daily consolidated transfer sheets relating to the
Common Stock (ii) the list of holders of all of the Company's securities and
(iii) a Blue Sky "Trading Survey" for secondary sales of the Company's
securities prepared by counsel to the Company.
(r) As soon as practicable, (i) but in no event more than 5 business
days before the effective date of the Registration Statement, file a Form 8-A
with the Commission providing for the registration under the Exchange Act of
the Securities and (ii) but in no event more than 30 days from the effective
date of the Registration Statement, take all necessary and appropriate actions
to be included in Standard and Poor's Corporation Descriptions and Moody's OTC
Manual and to continue such inclusion for a period of not less than seven (7)
years.
(s) The Company hereby agrees that it will not for a period of
thirteen (13) months from the effective date of the Registration Statement,
adopt, propose to adopt or otherwise permit to exist any employee, officer,
director, consultant or compensation plan or arrangement permitting the grant,
issue or sale of any shares of Common Stock or other securities of the Company
(i) in an amount greater than an aggregate of 500,000 shares, (ii) at an
exercise or sale price per share less than the greater of (a) the initial
public offering price of the Shares set forth herein and (b) the fair market
value of the Common Stock on the date of grant or sale, (iii) to any direct or
indirect beneficial holder on the date hereof of more than 10% of the issued
and outstanding shares of Common Stock, (iv) with the payment for such
securities with any form of consideration other than cash, (v) upon payment of
less than the full purchase or exercise price for such shares of Common Stock
or other securities of the Company on the date of grant or issuance, or (vi)
permitting the existence of stock appreciation rights, phantom options or
similar arrangements.
(t) Until the completion of the distribution of the Shares, the
Company shall not without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or
other communication or hold any press conference with respect to the Company
or its activities or the offering contemplated hereby, other than trade
releases issued in the ordinary course of the Company's business consistent
with past practices with respect to the Company's operations.
(u) For a period equal to the lesser of (i) three (3) years from the
date hereof, and (ii) the sale to the public of the Representative's Shares,
the Company will not take any action or actions which may prevent or
disqualify the Company's use of Form SB-2 or Form S-1 (or other appropriate
form) for the registration under the Act of the Representative's Shares.
(v) For a period of five (5) years after the effective date of the
Registration Statement, the Representative shall have the right to designate
for election one (1) individual to the Company's Board of Directors (the
"Board"). In the event the Representative elects not to exercise such right,
then it may designate one (1) individual to attend meetings of the Company's
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<PAGE>
Board. The Company shall notify the Representative of each meeting of the
Board and the Company shall send to such individual all notices and other
correspondence and communications sent by the Company to members of the Board.
Such individual shall be reimbursed for all out-of-pocket expenses incurred in
connection with his attendance of meetings of the Board.
(w) For a period of thirteen (13) months after the effective date of
the Registration Statement, the Company shall not restate, amend or alter any
term of any written employment, consulting or similar agreement entered into
between the Company and any officer, director or key employee as of the
effective date of the Registration Statement in a manner which is more
favorable to such officer, director or key employee, without the prior written
consent of the Representative.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as
provided in (iv) below) incident to the performance of the obligations of the
Company under this Agreement and the Representative's Warrant Agreement,
including, without limitation, (i) the fees and expenses of accountants and
counsel for the Company, (ii) all costs and expenses incurred in connection
with the preparation, duplication, printing, (including mailing and handling
charges) filing, delivery and mailing (including the payment of postage with
respect thereto) of the Registration Statement and the Prospectus and any
amendments and supplements thereto and the printing, mailing (including the
payment of postage with respect thereto) and delivery of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreements, and related
documents, including the cost of all copies thereof and of the Preliminary
Prospectuses and of the Prospectus and any amendments thereof or supplements
thereto supplied to the Underwriters and such dealers as the Underwriters may
request, in quantities as hereinabove stated, (iii) the printing, engraving,
issuance and delivery of the Securities including, but not limited to, (x) the
purchase by the Underwriters of the Shares and the purchase by the
Representative of the Representative's Warrants from the Company, (y) the
consummation by the Company of any of its obligations under this Agreement and
the Representative's Warrant Agreement, and (z) resale of the Shares by the
Underwriters in connection with the distribution contemplated hereby, (iv) the
qualification of the Securities under state or foreign securities or "Blue
Sky" laws and determination of the status of such securities under legal
investment laws, including the costs of printing and mailing the "Preliminary
Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal
Investments Survey," if any, and disbursements and fees of counsel in
connection therewith, (v) advertising costs and expenses, including but not
limited to costs and expenses in connection with the "road show", information
meetings and presentations, bound volumes and prospectus memorabilia and
"tomb-stone" advertisement expenses, (vi) costs and expenses in connection
with due diligence investigations, including but not limited to the fees of
any independent counsel or consultant retained, (vii) fees and expenses of the
transfer agent and registrar, (viii) applications for assignments of a rating
of the Securities by qualified rating agencies, (ix) the fees payable to the
Commission and the NASD, and (x) the fees and expenses incurred in connection
with the quotation of the Securities on NSM and any other exchange.
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<PAGE>
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 or Section 11, (i) the Company shall
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of Underwriters' Counsel, less
any amounts already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds received by the Company from the sale
of the Firm Shares, $50,000 of which has been paid to date. In the event the
Representative elects to exercise the over-allotment option described in
Section 2(b) hereof, the Company agrees to pay to the Representative on the
Option Closing Date (by certified or bank cashier's check or, at the
Representative's election, by deduction from the proceeds of the Option
Shares) a non-accountable expense allowance equal to three percent (3%) of the
gross proceeds received by the Company from the sale of the Option Shares.
6. Conditions of the Underwriters' Obligations. The obligations of
the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, with respect to
the Company as if it had been made on and as of the Closing Date or each
Option Closing Date, as the case may be; the accuracy on and as of the Closing
Date or Option Closing Date, if any, of the statements of the officers of the
Company made pursuant to the provisions hereof; and the performance by the
Company on and as of the Closing Date and each Option Closing Date, if any, of
its covenants and obligations hereunder and to the following further
conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 Noon, New York time, on the date of this Agreement or such later
date and time as shall be consented to in writing by the Representative, and,
at Closing Date and each Option Closing Date, if any, no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission
for additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to Closing Date the Company shall
have provided evidence satisfactory to the Representative of such timely
filing, or a post-effective amendment providing such information shall have
been promptly filed and declared effective in accordance with the requirements
of Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state
a fact which, in the Representative's opinion, is material and is required to
be stated therein or is necessary to make the statements
19
<PAGE>
therein not misleading, or that the Prospectus, or any supplement thereto,
contains an untrue statement of fact which, in the Representative's opinion,
is material, or omits to state a fact which, in the Representative's opinion,
is material and is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(c) On or prior to the Closing Date, the Representative shall have
received from Underwriters' Counsel, such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Representative's Warrants, the Registration Statement, the Prospectus and
other related matters as the Representative may request and Underwriters'
Counsel shall have received such papers and information as they request to
enable them to pass upon such matters.
(d) At Closing Date, the Underwriter shall have received the
favorable opinion of Moskowitz Altman & Hughes LLP, counsel to the Company,
dated the Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction, (B) is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership
or leasing of any properties or the character of its operations
requires such qualification or licensing, and (C) has all requisite
corporate power and authority; and the Company has obtained any and
all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or
regulatory officials and bodies (including, without limitation, those
having jurisdiction over environmental or similar matters), to own or
lease its properties and conduct its business as described in the
Prospectus; the Company is and has been doing business in material
compliance with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits and all federal, state and local
laws, rules and regulations; the Company has not received any notice
of proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially adversely
affect the business, operations, condition, financial or otherwise,
or the earnings, business affairs, position, prospects, value,
operation, properties, business or results of operations of the
Company. The disclosures in the Registration Statement concerning the
effects of federal, state and local laws, rules and regulations on
the Company's business as currently conducted and as contemplated are
correct in all material respects and do not omit to state a fact
necessary to make the statements contained therein not misleading in
light of the circumstances in which they were made;
(ii) to the best of such counsel's knowledge, the Company
does not own an interest in any other corporation, partnership, joint
venture, trust or other business entity;
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<PAGE>
(iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under "Capitalization" and
"Description of Securities," and the Company is not a party to or
bound by any instrument, agreement or other arrangement providing for
it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement, the Representative's Warrant
Agreement and as described in the Prospectus. The Securities, and all
other securities issued or issuable by the Company conform in all
material respects to all statements with respect thereto contained in
the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission with respect thereto, and are
not subject to personal liability by reason of being such holders;
and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company. The
Shares, the Representative's Warrants and the Representative's Shares
to be sold by the Company hereunder and under the Representative's
Warrant Agreement are not and will not be subject to any preemptive
or other similar rights of any stockholder, have been duly authorized
and, when issued, paid for and delivered in accordance with the terms
hereof, will be validly issued, fully paid and non-assessable and
conform to the description thereof contained in the Prospectus; the
holders thereof will not be subject to any liability solely as such
holders; all corporate action required to be taken for the
authorization, issue and sale of the Shares, the Representative's
Warrants and the Representative's Shares has been duly and validly
taken; and the certificates representing the Shares and the
Representative's Warrants are in due and proper form. The
Representative's Warrants constitute valid and binding obligations of
the Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company called for
thereby. Upon the issuance and delivery pursuant to this Agreement
and the Representative's Warrant Agreement of the Shares and the
Representative's Warrants, respectively, to be sold by the Company,
the Representative and the Representative, respectively, will acquire
good and marketable title to the Shares and Representative's Warrants
free and clear of any pledge, lien, charge, claim, encumbrance,
pledge, security interest, or other restriction or equity of any kind
whatsoever. No transfer tax is payable by or on behalf of the
Underwriters in connection with (A) the issuance by the Company of
the Shares, (B) the purchase by the Underwriters of the Shares and
the Representative's Warrants, respectively, from the Company, (C)
the consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (D) resales
of the Shares in connection with the distribution contemplated
hereby;
(iv) the Registration Statement is effective under the Act,
and, if applicable, filing of all pricing information has been timely
made in the appropriate form under Rule 430A, and no stop order
suspending the use of the Preliminary Prospectus, the Registration
Statement or Prospectus or any part of any thereof or suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or,
to the best of such counsel's knowledge, threatened or contemplated
under the Act;
(v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements
thereto (other than the financial
21
<PAGE>
statements and other financial and statistical data included therein,
as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Rules and
Regulations;
(vi) to the best of such counsel's knowledge, (A) there are
no agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed
as exhibits to the Registration Statement other than those described
in the Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated, in whole
or in part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are correct
copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto of contracts and other documents to
which the Company is a party or by which it is bound, including any
document to which the Company is a party or by which it is bound,
incorporated by reference into the Prospectus and any supplement or
amendment thereto, are accurate in all material respects and fairly
represent the information required to be shown by Form SB-2; (C)
there is not pending or threatened against the Company any action,
arbitration, suit, proceeding, inquiry, investigation, litigation,
governmental or other proceeding (including, without limitation,
those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances
that may give rise to the same), or involving the properties or
business of the Company which (x) is required to be disclosed in the
Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are
accurately summarized in all material respects), (y) questions the
validity of the capital stock of the Company or this Agreement or the
Representative's Warrant Agreement, or of any action taken or to be
taken by the Company pursuant to or in connection with any of the
foregoing; (D) no statute or regulation or legal or governmental
proceeding required to be described in the Prospectus is not
described as required; and (E) there is no action, suit or proceeding
pending, or threatened, against or affecting the Company before any
court or arbitrator or governmental body, agency or official (or any
basis thereof known to such counsel) in which there is a reasonable
possibility of an adverse decision which may result in a material
adverse change in the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value,
operation, properties, business or results of operations of the
Company, which could adversely affect the present or prospective
ability of the Company to perform its obligations under this
Agreement or the Representative's Warrant Agreement or which in any
manner draws into question the validity or enforceability of this
Agreement or the Representative's Warrant Agreement;
(vii) the Company has full legal right, power and authority
to enter into each of this Agreement and the Representative's Warrant
Agreement and to consummate the transactions provided for herein and
therein; and each of this Agreement and the Representative's Warrant
Agreement has been duly authorized, executed and delivered by the
Company. Each of this Agreement and the Representative's Warrant
Agreement, assuming due authorization, execution and delivery by each
other party thereto constitutes a legal, valid and binding agreement
of the Company enforceable against the Company in accordance with its
terms (except as such enforceability may be
22
<PAGE>
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable
law), and none of the Company's execution or delivery of this
Agreement and the Representative's Warrant Agreement, its performance
hereunder or thereunder, its consummation of the transactions
contemplated herein or therein, or the conduct of its business as
described in the Registration Statement, the Prospectus, and any
amendments or supplements thereto, conflicts with or will conflict
with or results or will result in any breach or violation of any of
the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or
other restriction or equity of any kind whatsoever upon, any property
or assets (tangible or intangible) of the Company pursuant to the
terms of, (A) the certificate of incorporation or by-laws of the
Company, (B) any license, contract, indenture, mortgage, deed of
trust, voting trust agreement, stockholders agreement, note, loan or
credit agreement or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which any
of its respective properties or assets (tangible or intangible) is or
may be subject, or any indebtedness, or (C) any statute, judgment,
decree, order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic
or foreign, having jurisdiction over the Company or any of its
activities or properties;
(viii) except as described in the Prospectus, no consent,
approval, authorization or order of, and no filing with, any court,
regulatory body, government agency or other body (other than such as
may be required under Blue Sky laws, as to which no opinion need be
rendered) is required in connection with the issuance of the Shares
pursuant to the Prospectus, the issuance of the Representative's
Warrants, and the Registration Statement, the performance of this
Agreement and the Representative's Warrant Agreement, and the
transactions contemplated hereby and thereby;
(ix) the properties and business of the Company conform in
all material respects to the description thereof contained in the
Registration Statement and the Prospectus; and the Company has good
and marketable title to, or valid and enforceable leasehold estates
in, all items of real and personal property stated in the Prospectus
to be owned or leased by it, in each case free and clear of all
liens, charges, claims, encumbrances, pledges, security interests,
defects or other restrictions or equities of any kind whatsoever,
other than those referred to in the Prospectus and liens for taxes
not yet due and payable.
(x) to the best knowledge of such counsel, the Company is
not in breach of, or in default under, any term or provision of any
license, contract, indenture, mortgage, installment sale agreement,
deed of trust, lease, voting trust agreement, stockholders'
agreement, partnership agreement, note, loan or credit agreement or
any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the
Company is a party or by which the Company
23
<PAGE>
may be bound or to which the property or assets (tangible or
intangible) of the Company is subject or affected; and the Company is
not in violation of any term or provision of its certificate of
incorporation by-laws, or in violation of any franchise, license,
permit, judgment, decree, order, statute, rule or regulation;
(xi) the statements in the Prospectus under "BUSINESS,"
"MANAGEMENT," "PRINCIPAL SHAREHOLDERS," "CERTAIN TRANSACTIONS,"
"DESCRIPTION OF SECURITIES," and "SHARES ELIGIBLE FOR FUTURE SALE"
have been reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions, are correct in all material
respects;
(xii) the Shares have been accepted for quotation on NSM;
(xiii) the persons listed under the caption "PRINCIPAL
SHAREHOLDERS" in the Prospectus are the respective "beneficial
owners" (as such phrase is defined in regulation 13d-3 under the
Exchange Act) of the securities set forth opposite their respective
names thereunder as and to the extent set forth therein;
(xiv) except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
(xv) except as described in the Prospectus, there are no
claims, payments, issuances, arrangements or understandings for
services in the nature of a finder's or origination fee with respect
to the sale of the Securities hereunder or financial consulting
arrangement or any other arrangements, agreements, understandings,
payments or issuances that may affect the Underwriters' compensation,
as determined by the NASD;
(xvi) assuming due execution by the parties thereto other
than the Company, the Lock-up Agreements are legal, valid and binding
obligations of parties thereto, enforceable against the party and any
subsequent holder of the securities subject thereto in accordance
with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting
enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law); and
(xvii) except as described in the Prospectus, the Company
does not (A) maintain, sponsor or contribute to any ERISA Plans, (B)
maintain or contribute, now or at any time previously, to a defined
benefit plan, as defined in Section 3(35) of ERISA, and (C) has never
completely or partially withdrawn from a "multiemployer plan".
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company at which
conferences such counsel made inquiries of such officers,
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representatives and accountants and discussed the contents of the Preliminary
Prospectus, the Registration Statement, the Prospectus, and related matters
were discussed and, although such counsel is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Preliminary Prospectus, the Registration Statement
and Prospectus, on the basis of the foregoing, no facts have come to the
attention of such counsel which lead them to believe that either the
Registration Statement or any amendment thereto, at the time such Registration
Statement or amendment became effective or the Preliminary Prospectus or
Prospectus or amendment or supplement thereto as of the date of such 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 (it being understood that such counsel need
express no opinion with respect to the financial statements and schedules and
other financial and statistical data included in the Preliminary Prospectus,
the Registration Statement or Prospectus).
Such opinion shall not state that it is to be governed or qualified
by, or that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991), or any comparable
State bar accord.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the
applicable laws; (B) as to matters of fact, to the extent they deem proper, on
certificates and written statements of responsible officers of the Company,
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company, provided that copies of any such
statements or certificates shall be delivered to Underwriters' Counsel if
requested. The opinion shall also state that the Underwriters' Counsel is
entitled to rely thereon. The opinion of such counsel for the Company shall
state that the opinion of any such other counsel is in form satisfactory to
such counsel and that the Underwriters and they are justified in relying
thereon.
(e) At the Closing Date, the Underwriters shall have received the
favorable opinion, satisfactory in form and substance to Underwriters'
Counsel, from [ ], intellectual property counsel to the Company, to the
effect set forth in Exhibit A.
At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Moskowitz Altman & Hughes LLP, counsel to
the Company, and [ ], intellectual property counsel to the Company,
each dated the Option Closing Date, addressed to the Underwriters and in form
and substance satisfactory to Underwriters' Counsel confirming as of Option
Closing Date the statements made by each of Moskowitz Altman & Hughes LLP and
[ ] in their respective opinions delivered on the Closing Date.
(f) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions
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as they may reasonably require for the purpose of enabling them to review or
pass upon the matters referred to in subsection (c) of this Section 6, or in
order to evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions of the Company, or herein contained.
(g) Prior to each of the Closing Date and each Option Closing Date,
if any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, stockholders' equity or the business activities of the Company,
whether or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and
Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the Registration
Statement and Prospectus which is materially adverse to the Company; (iii) the
Company shall not be in default under any provision of any instrument relating
to any outstanding indebtedness; (iv) the Company shall not have issued any
securities (other than the Securities); the Company shall not have declared or
paid any dividend or made any distribution in respect of its capital stock of
any class; and there has not been any change in the capital stock of the
Company, or any material change in the debt (long or short term) or
liabilities or obligations of the Company (contingent or otherwise); (v) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus;
(vi) no action, suit or proceeding, at law or in equity, shall have been
pending or threatened (or circumstances giving rise to same) against the
Company, or affecting any of its properties or business before or by any court
or federal, state or foreign commission, board or other administrative agency
wherein an unfavorable decision, ruling or finding may adversely affect the
business, operations, prospects or financial condition or income of the
Company, except as set forth in the Registration Statement and Prospectus; and
(vii) no stop order shall have been issued under the Act and no proceedings
therefor shall have been initiated, threatened or contemplated by the
Commission.
(h) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed by
the principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined
the Registration Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the
Closing Date or the Option Closing Date, as the case may be, and the
Company has complied with all agreements and covenants and satisfied
all conditions contained in this Agreement on its part to be
performed or satisfied at or prior to such Closing Date or Option
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or,
to the best of each of such person's knowledge, after due inquiry are
contemplated or threatened under the Act;
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(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto, contain all
statements and information required to be included therein, and none
of the Registration Statement, the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and neither
the Preliminary Prospectus or any supplement thereto included any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (a) the Company has not incurred up to and including the
Closing Date or the Option Closing Date, as the case may be, other
than in the ordinary course of its business, any material liabilities
or obligations, direct or contingent; (b) the Company has not paid or
declared any dividends or other distributions on its capital stock;
(c) the Company has not entered into any transactions not in the
ordinary course of business; (d) there has not been any change in the
capital stock of the Company or any material change in the debt (long
or short-term) of the Company; (e) the Company has not sustained any
material loss or damage to its property or assets, whether or not
insured; (g) there is no litigation which is pending or threatened
(or circumstances giving rise to same) against the Company, or any
affiliated party of any of the foregoing which is required to be set
forth in an amended or supplemented Prospectus which has not been set
forth; and (h) there has occurred no event required to be set forth
in an amended or supplemented Prospectus which has not been set
forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(i) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable
to the Underwriters, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) in all respects to
the Underwriters and Underwriters' Counsel, from KPMG;
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects
with the applicable accounting requirements of the Act and the Rules
and Regulations thereunder and that the Underwriters may rely upon
the opinion of KPMG with respect to such financial statements and
supporting schedules included in the Registration Statement;
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<PAGE>
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim
financial statements of the Company, a reading of the latest
available minutes of the stockholders and board of directors and the
various committees of the boards of directors of the Company,
consultations with officers and other employees of the Company
responsible for financial and accounting matters and other specified
procedures and inquiries, nothing has come to their attention which
would lead them to believe that (A) the pro forma financial
information contained in the Registration Statement and Prospectus
does not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations or is not fairly presented in conformity with generally
accepted accounting principles applied on a basis consistent with
that of the audited financial statements of the Company or the
unaudited pro forma financial information included in the
Registration Statement, (B) the unaudited financial statements and
supporting schedules of the Company included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the
Company included in the Registration Statement, or (C) at a specified
date not more than five (5) days prior to the effective date of the
Registration Statement, there has been any change in the capital
stock of the Company, any change in the long-term debt of the
Company, or any decrease in the stockholders' equity of the Company
or any decrease in the net current assets or net assets of the
Company as compared with amounts shown in the _____, 1998 balance
sheets included in the Registration Statement, other than as set
forth in or contemplated by the Registration Statement, or, if there
was any change or decrease, setting forth the amount of such change
or decrease, and (D) during the period from ______, 1998 to a
specified date not more than five (5) days prior to the effective
date of the Registration Statement, there was any decrease in net
revenues or net earnings of the Company or increase in net earnings
per common share of the Company, in each case as compared with the
corresponding period beginning _____, 1997 other than as set forth in
or contemplated by the Registration Statement, or, if there was any
such decrease, setting forth the amount of such decrease;
(iv) setting forth, at a date not later than five (5) days
prior to the date of the Registration Statement, the amount of
liabilities of the Company (including a break-down of commercial
paper and notes payable to banks);
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth
in the Prospectus in each case to the extent that such amounts,
numbers, percentages, statements and information may be derived from
the general accounting records, including work sheets, of the Company
and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and
found them to be in agreement; and
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<PAGE>
(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriters may request.
(k) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from KPMG a letter, dated as of the Closing
Date or the Option Closing Date, as the case may be, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection
(j) of this Section hereof except that the specified date referred to shall be
a date not more than five days prior to the Closing Date or the Option Closing
Date, as the case may be, and, if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that they have carried out
procedures as specified in clause (v) of subsection (j) of this Section with
respect to certain amounts, percentages and financial information as specified
by the Underwriters and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(l) The Company shall have delivered to the Representative a letter
from KPMG addressed to the Company stating that they have not during the
immediately preceding two year period brought to the attention of the
Company's management any "weakness" as defined in Statement of Auditing
Standards No. 60 "Communication of Internal Control Structure Related Matters
Noted in an Audit," in any of the Company's internal controls.
(m) On each of the Closing Date and Option Closing Date, if any,
there shall be duly tendered to the Underwriters the appropriate number of
Securities.
(n) No order suspending the sale of the Securities in any
jurisdiction designated by the Underwriters pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the
Option Closing Date, if any, and no proceedings for that purpose shall have
been instituted or shall be contemplated.
(o) On or before the Closing Date, the Company shall have executed
and delivered to the Representative, (i) the Representative's Warrant
Agreement substantially in the form filed as Exhibit __ to the Registration
Statement in final form and substance satisfactory to the Representative, and
(ii) the Representative's Warrants in such denominations and to such designees
as shall have been provided to the Company.
(p) On or before the Closing Date, the Shares shall have been duly
approved for quotation on NSM, subject to official notice of issuance.
(q) On or before the Closing Date, there shall have been delivered to
the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Representative's Counsel.
If any condition to the Representative's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
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7. Indemnification.
(a) The Company, agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person, if any, who
controls the Underwriter ("controlling person") within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, from and against any and
all losses, claims, damages, expenses or liabilities, joint or several (and
actions, proceedings, investigations, inquiries, and suits in respect
thereof), whatsoever (including but not limited to any and all costs and
expenses whatsoever reasonably incurred in investigating, preparing or
defending against such action, proceeding, investigation, inquiry or suit,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon (A) any
untrue statement or alleged untrue statement of a material fact contained (i)
in any Preliminary Prospectus, the Registration Statement or the Prospectus
(as from time to time amended and supplemented); (ii) in any post-effective
amendment or amendments or any new registration statement and prospectus in
which is included securities of the Company issued or issuable upon exercise
of the Securities; or (iii) in any application or other document or written
communication (in this Section 7 collectively called "application") executed
by the Company or based upon written information furnished by the Company
filed, delivered or used in any jurisdiction in order to qualify the
Securities under the securities laws thereof or filed with the Commission, any
state securities commission or agency, NSM or any other securities exchange,
(B) the omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not misleading
(in the case of the Prospectus, in the light of the circumstances under which
they were made), or (C) any breach of any representation, warranty, covenant
or agreement of the Company contained herein or in any certificate by or on
behalf of the Company or any of its officers delivered pursuant hereto unless,
in the case of clause (A) or (B) above, such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company with respect to any Underwriter by or on behalf of such Underwriters
expressly for use in any Preliminary Prospectus, the Registration Statement or
any Prospectus, or any amendment thereof or supplement thereto, or in any
application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition
to any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same
extent as the foregoing indemnity from the Company to the Underwriter but only
with respect to statements or omissions, if any, made in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof
or supplement thereto or in any application made in reliance upon, and in
strict conformity with, written information furnished to the Company with
respect to any Underwriter by such Underwriter expressly for use in such
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written
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<PAGE>
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering.
The Company acknowledges that the statements with respect to the public
offering of the Securities set forth under the heading "Underwriting" and the
stabilization legend in the Prospectus have been furnished by the Underwriter
expressly for use therein and constitute the only information furnished in
writing by or on behalf of the Underwriters for inclusion in the Prospectus.
The indemnity agreement in this subsection (b) shall be in addition
to any liability which the Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against
one or more indemnifying parties under this Section 7, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party shall not relieve
it from any liability which it may have under this Section 7 except to the
extent that it has been prejudiced in any material respect by such failure or
from any liability which it may have otherwise). In case any such action,
investigation, inquiry, suit or proceeding is brought against any indemnified
party, and it notifies an indemnifying party or parties of the commencement
thereof, the indemnifying party or parties will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying parties
in connection with the defense of such action at the expense of the
indemnifying party, (ii) the indemnifying parties shall not have employed
counsel reasonably satisfactory to such indemnified party to have charge of
the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have
the right to direct the defense of such action, investigation, inquiry, suit
or proceeding on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action, investigation, inquiry, suit or proceeding or separate but
similar or related actions, investigations, inquiries, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
consent was not unreasonably withheld. An indemnifying party will not, without
the prior written consent of the indemnified parties, settle compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, investigation, inquiry, suit or proceeding in respect of which
indemnification or contribution may be sought
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hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party form
all liability arising out of such claim, action, suit or proceeding and (ii)
doe snot include a statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of this Section 7 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of
any indemnified party, then each indemnifying party shall contribute to the
amount paid as a result of such losses, claims, damages, expenses or
liabilities (or actions, investigations, inquiries, suits or proceedings in
respect thereof) (A) in such proportion as is appropriate to reflect the
relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Securities or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of each of the contributing parties, on the one hand, and the
party to be indemnified on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In any
case where the Company is the contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Securities
(before deducting expenses) bear to the total underwriting discounts received
by the Underwriters hereunder, in each case as set forth in the table on the
Cover Page of the Prospectus. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, or by the Underwriters, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
expenses or liabilities (or actions, investigations, inquiries, suits or
proceedings in respect thereof) referred to above in this subdivision (d)
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action, claim, investigation, inquiry, suit or proceeding. Notwithstanding the
provisions of this subdivision (d) the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company within the meaning of the Act, each officer of
the Company who has signed the Registration Statement, and each director of
the Company shall have the same rights to contribution as the Company, subject
in each case to this subparagraph (d). Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit,
inquiry, investigation or proceeding against such party in respect to which a
claim for contribution may
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be made against another party or parties under this subparagraph (d), notify
such party or parties from whom contribution may be sought, but the omission
so to notify such party or parties shall not relieve the party or parties from
whom contribution may be sought from any obligation it or they may have
hereunder or otherwise than under this subparagraph (d), or to the extent that
such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant
hereto, shall be deemed to be representations, warranties and agreements at
the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the indemnity
agreements contained in Section 7 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter, the Company, any controlling person of any Underwriter or the
Company, and shall survive termination of this Agreement or the issuance and
delivery of the Securities to the Underwriters.
9. Effective Date.
(a) This Agreement shall become effective at 10:00 a.m., New York
City time, on the next full business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Shares for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Shares to be purchased hereunder shall be deemed to have been so released upon
the earlier of dispatch by the Representative of telegrams to securities
dealers releasing such shares for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Shares.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the Representative
shall have the right to terminate this Agreement, after the date hereof, (i)
if any domestic or international event or act or occurrence has materially
disrupted, or in the Representative's opinion will in the immediate future
materially adversely disrupt the financial markets; or (ii) any material
adverse change in the financial markets shall have occurred; or (iii) if
trading generally shall have been suspended or materially limited on or by, as
the case may be, any of the New York Stock Exchange, the American Stock
Exchange, the National Association of Securities Dealers, Inc., the Boston
Stock Exchange, the Chicago Board of Trade, the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange, the Commission or any other
government authority having jurisdiction; or (iv) if trading of any of the
securities of the Company shall have been suspended, or any of the securities
of the Company shall have been delisted, on any exchange or in any
over-the-counter market; or (v) if the United States shall have become
involved in a war or major hostilities, or if there shall have been an
escalation in an existing war or major hostilities or a national emergency
shall have been declared in the United States; or (vi) if a banking moratorium
has been declared by a state or federal authority; or (vii) if a moratorium
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in foreign exchange trading has been declared; or (viii) if the Company shall
have sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act which, whether or not such loss shall have been insured, will,
in the Representative's opinion, make it inadvisable to proceed with the
delivery of the Securities; or (viii) if there shall have occurred any
outbreak or escalation of hostilities or any calamity or crisis or there shall
have been such a material adverse change in the conditions or prospects of the
Company, or such material adverse change in the general market, political or
economic conditions, in the United States or elsewhere as in the
Representative's judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities.
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) the Company shall promptly
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
(less amounts previously paid pursuant to Section 5(c) above). Notwithstanding
any contrary provision contained in this Agreement, if this Agreement shall
not be carried out within the time specified herein, or any extension thereof
granted to the Representative, by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement
by it to be performed or satisfied (including, without limitation, pursuant to
Section 6 or Section 12) then, the Company shall promptly reimburse and
indemnify the Underwriter for all of their actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriter (less
amounts previously paid pursuant to Section 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees and expenses and
filing fees. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10 and 12 hereof), and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Substitution of the Underwriters. If one or more of the
Underwriters shall fail otherwise than for a reason sufficient to justify the
termination of this Agreement (under the provisions of Section 6, Section 10
or Section 12 hereof) to purchase the Securities which it or they are
obligated to purchase on such date under this Agreement (the "Defaulted
Securities"), the Representative shall have the right, within 24 hours
thereafter, to make arrangement for one or more of the non-defaulting
Underwriters, or any other Underwriters, to purchase all, but not less than
all, of the Defaulted Securities in such amounts as may be agreed upon and
upon the terms herein set forth; if, however, the Representative shall not
have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Shares to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to
the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Shares, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriters.
34
<PAGE>
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing
Date or at any Option Closing Date, as applicable, to sell and deliver the
number of Shares which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect
to any Option Shares to be purchased on an Option Closing Date, the
Underwriters may at their option, by notice from the Underwriters or the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Shares from the Company on such date) without any liability on
the part of any non-defaulting party other than pursuant to Section 5, Section
7 and Section 10 hereof. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form
of telecommunication. Notices to the Representative shall be directed to the
Representative at 850 Third Avenue, New York, New York 10022, Attention:
Robert Reale, with a copy to Orrick, Herrington & Sutcliffe LLP, 30
Rockefeller Plaza, New York, New York 10112, Attention: Lawrence B. Fisher,
Esq. Notices to the Company shall be directed to the Company at 456 Glenbrook
Road, Stamford, Connecticut 06906, Attention: William Wheaton, III, with a
copy to Moskowitz Altman & Hughes LLP, 11 East 44th Street, Suite 504, New
York, New York 10017, Attention: John J. Hughes, Jr., Esq.
14. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Agreement or any provisions
herein contained. No purchaser of Securities from the Underwriters shall be
deemed to be a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York without
giving effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter
35
<PAGE>
hereof. This Agreement may not be amended except in a writing, signed by the
Representative and the Company.
36
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among us.
Very truly yours,
VCS TECHNOLOGIES, INC.
By:
----------------------------------------
Name:
Title:
Confirmed and accepted as of
the date first above written.
GILFORD SECURITIES INCORPORATED
By:
----------------------------
Name:
Title:
<PAGE>
SCHEDULE A
Underwriter Number of Firm Shares
- ----------- ---------------------
Gilford Securities Incorporated
TOTAL 1,000,000
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION OF
VCS TECHNOLOGIES, INC.
The undersigned officer of VCS Technologies, Inc. (the "Company") does
hereby certify that the following Restated Certificate of Incorporation has
been duly adopted by the directors and the shareholders of the Company in
accordance with Section 242 and Section 245 of the General Corporation Law of
the State of Delaware. The undersigned further certifies that the Company's
Certificate of Incorporation was originally filed with the Secretary of State
of the State of Delaware as of July 12, 1995. The name of the Company as
stated on the original Certificate of Incorporation was "VC Solutions, Inc."
and was changed to "VCS Technologies, Inc." by means of an amendment to the
Certificate of Incorporation as of January 27, 1997
First: The name of the Company is VCS Technologies, Inc.
Second: The registered office of the Company in the State of Delaware is
to be located at 15 East North Street, Dover, Delaware 19901, in
the County of Kent. The registered agent in charge thereof is
Vanguard Corporate Services, Ltd.
Third: The purpose of the Company is to engage in any lawful activity
for which corporations may be organized under the General
Corporation Law of the State of Delaware.
Fourth: The total number of shares of capital stock which the Company
shall have authority to issue is 50,000,000 shares, of which
49,000,000 shares shall be Common Stock, $0.001 par value, of
which 990,000 shares are Preferred Stock, $0.001 par value,
which shall be subject to the provisions of Article Fifth, and
of which 10,000 shares are Series A Preferred Stock, $0.001 par
value, which shall be subject to the provisions of Article
Sixth.
Fifth: The Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of Article Fourth, to
provide for the issuance of the shares of Preferred Stock in
series, and by filing a certificate pursuant to the applicable
law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix
the designation, powers, preferences and rights of the shares of
each such series and the qualifications, limitations or
restrictions thereof.
Sixth: The powers, preferences and rights of the Series A Preferred
Stock are as set forth in this Article Sixth.
1. Dividends. The holders of Series A Preferred Stock shall be
entitled to receive, when and as declared by the Board of
Directors out of funds legally available for such purpose, cash
dividends at the rate of $8.50 per share per annum (computed on
the basis of a 360- day year consisting of twelve 30-day months)
and no more, payable yearly no later than 90 days following the
end of each fiscal year. Such dividends shall be cumulative and
shall accrue, whether or not declared, from the date of issue of
the Series A Preferred Stock. So long as any accrued dividends on
outstanding Series A Preferred Stock shall remain unpaid, no
dividends whatsoever shall be declared or paid upon, nor shall any
distribution be made upon, any shares of any other class of stock
of the Company (other than a dividend or distribution payable in
Common Stock).
2. Liquidation. Upon any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, before any
distribution or payment is made upon Common Stock or Preferred
Stock (other than the Series A Preferred Stock), the holders of
Series A
<PAGE>
Preferred Stock shall be entitled to be paid a cash amount of up
to $100 per share, plus all unpaid dividends accrued thereon, and
the holders of Series A Preferred Stock shall not be entitled to
any further payment. Written notice of such liquidation,
dissolution or winding up, stating a payment date, the amount of
the payment and the place where the payment shall be payable,
shall be given by mail, postage prepaid, not less than fifteen
days prior to the payment date stated therein, to the holders of
record of Series A Preferred Stock, such notice to be addressed
to each such holder at the address shown on the records of the
Company. Neither the consolidation or merger of the Company into
or with any other corporation or corporations, nor the sale or
transfer by the Company of all or substantially all its assets,
shall be deemed to be a liquidation, dissolution or winding up
of the Company within the meaning of the provisions of this
Section 2 of Article Sixth.
3. Conversion. The holder of any shares of Series A Preferred
Stock shall have the right, at its option at any time, to
convert such shares into such number of fully paid and
nonassessable whole shares of Common Stock (or successor
security) as is obtained by multiplying the number of shares of
Series A Preferred Stock to be converted by 100 and dividing the
result by the conversion price of $8.50 per share, as such
conversion price may adjusted from time to time for corporate
reorganizations, forward or reverse stock splits or dividends
paid on the outstanding Common Stock paid in Common Stock. The
rights of conversion contained in this Section 3 of Article
Sixth shall be exercised by the holder by giving to the Company
written notice specifying the number of shares of Series A
Preferred Stock to be converted and by surrendering to the
Company such certificate or certificates evidencing the shares
to be converted.
4. Redemption. The Company may elect at any time to purchase and
redeem any number of outstanding shares of Series A Preferred
Stock by paying to the holder thereof, in cash, the sum of $100
per share plus all unpaid dividends accrued thereon. Notice of
each redemption of Series A Preferred Stock, specifying the date
and place of redemption and the number of shares and certificate
numbers thereof which are to be redeemed, shall be given by
mail, postage prepaid, not less than fifteen days prior to the
redemption date stated therein, to the holders of record of
Series A Preferred Stock, such notice to be addressed to each
such holder at the address shown on the records of the Company.
5. Voting Rights. Except as otherwise provided by law, the
holders of Series A Preferred Stock shall not be entitled to
vote in any proceeding or on any matter or question at any
meeting of the Company's shareholders.
Seventh: The directors of the Company shall have the power to adopt,
amend or repeal the By-laws of the Company.
Eighth: The personal liability of the directors of the Company is hereby
eliminated to the fullest extent permitted by Section 102(b)(7)
of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented.
Ninth: The Company shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section
from and against any and all of the expenses, liabilities, or
other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be
entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has
ceased to be director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators
of such a person.
<PAGE>
IN WITNESS WHEREOF, the undersigned officer of VCS Technologies, Inc. has
executed this certificate on September 22, 1998 and affirms under the
penalties of perjury that the statements contained herein are true and
correct.
/s/ William E. Wheaton III
--------------------------
William E. Wheaton III
President
<PAGE>
BY-LAWS
OF
VCS Technologies, Inc.
ARTICLE I - OFFICES
The office of the Corporation shall be located in the City and State designated
in the Articles of Incorporation. The Corporation may also maintain offices at
such other places within or without the United States as the Board of Directors
may, from time to time, determine.
ARTICLE II - MEETING OF SHAREHOLDERS
Section 1- Annual Meetings:
The annual meeting of the shareholders of the Corporation shall be held within
five months after the close of the fiscal year of the Corporation, for the
purpose of electing directors, and transacting such other business as may
properly come before the meeting.
Section 2- Special Meetings:
Special meetings of the shareholders may be called at any time by the Board of
Directors or by the President, and shall be called by the President or the
Secretary at the written request of the holders of ten percent (10%) of the
shares then outstanding and entitled to vote thereat, or as otherwise required
under the provisions of the Business Corporation Act.
Section 3- Place of Meetings:
All meetings of shareholders shall. be held at the principal office of the
Corporation, or at such other places as shall be designated in the notices or
waivers of notice of such meetings.
Section 4- Notice of Meetings:
(a) Except as otherwise provided by Statute, written notice of each meeting of
shareholders, whether annual or special, stating the time when and place where
it is to be held, shall be served either personally or by mail, not less than
ten or more than fifty days before the meeting, upon each shareholder of record
entitled to vote at such meeting, and to any other shareholder to whom the
giving of notice may be required by law. Notice of a special meeting shall also
state the purpose or purposes for which the meeting is called, and shall
indicate that it is being issued by, or at the direction of, the person or
persons calling the meeting. If, at any meeting, action is proposed to be taken
that would, if taken, entitle shareholders to receive payment for their shares
pursuant to Statute, the notice of such meeting shall include a statement of
that purpose and to that effect. If mailed, such notice shall be directed to
each such shareholder at his address, as it appears on the records of the
shareholders of the Corporation, unless he shall have previously filed with the
Secretary of the Corporation a written
By-Laws-1
<PAGE>
request that notices intended for him be mailed to the address designated in
such request.
(b) Notice of any meeting need not be given to any person who may become a
shareholder of record after the mailing of such notice and prior to the meeting,
or to any shareholder who attends such meeting, in person or by proxy, or to any
shareholder who, in person or by proxy, submits a signed waiver of notice either
before or after such meeting. Notice of any adjourned meeting of shareholders
need not be given, unless otherwise required by statute.
Section 5- Quorum:
(a) Except as otherwise provided herein, or by statute, or in the Certificate of
Incorporation (such Certificate and any amendments thereof being hereinafter
collectively referred to as the "Certificate of Incorporation"), at all meetings
of shareholders of the Corporation, the presence at the commencement of such
meetings in person or by proxy of shareholders holding of record a majority of
the total number of shares of the Corporation then issued and outstanding and
entitled to vote, shall be necessary and sufficient to constitute a quorum for
the transaction of any business. The withdrawal of any shareholder after the
commencement of a meeting shall have no effect on the existence of a quorum,
after a quorum has been established at such meeting.
(b) Despite the absence of a quorum at any annual or special meeting of
shareholders, the shareholders, by a majority of the votes cast by the holders
of shares entitled to vote thereon, may adjourn the meeting. At any such
adjourned meeting at which a quorum is present, any business may be transacted
at the meeting as originally called if a quorum had been present.
Section 6- Voting
(a) Except as otherwise provided by statute or by the Certificate of
Incorporation, any corporate action, other than the election of directors to be
taken by vote of the shareholders, shall be authorized by a majority of votes
cast at a meeting of shareholders by the holders of shares entitled to vote
thereon.
(b) Except as otherwise provided by statute or by the Certificate of
Incorporation, at each meeting of shareholders, each holder of record of stock
of the Corporation entitled to vote thereat, shall be entitled to one vote for
each share of stock registered in his name on the books of the Corporation.
(c) Each shareholder entitled to vote or to express consent or dissent without a
meeting, may do so by proxy; provided, however, that the instrument authorizing
such proxy to act shall have been executed in writing by the shareholder
himself, or by his attorney-in-fact thereunto duly authorized in writing. No
proxy shall be valid after the expiration of eleven months from the date of its
execution, unless the persons executing it shall have specified therein the
length of time it is to continue in force. Such instrument shall be exhibited to
the Secretary at the meeting and shall be filed with the records of the
Corporation.
(d) Any resolution in writing, signed by all of the shareholders entitled to
vote thereon, shall be and constitute action by such shareholders to the effect
therein expressed, with the same force and effect as if the same had been duly
passed by unanimous vote at a duly called
By-Laws-2
<PAGE>
meeting of shareholders and such resolution so signed shall be inserted in the
Minute Book of the Corporation under its proper date.
ARTICLE III - BOARD OF DIRECTORS
Section 1- Number, Election and Term of Office:
(a) The number of the directors of the Corporation shall be five (5), unless and
until otherwise determined by vote of a majority of the entire Board of
Directors. The number of Directors shall not be less than three, unless all of
the outstanding shares are owned beneficially and of record by less than three
shareholders, in which event the number of directors shall not be less than the
number of shareholders permitted by statute.
(b) Except as may otherwise be provided herein or in the Certificate of
Incorporation, the members of the Board of Directors of the Corporation, who
need not be shareholders, shall be elected by a majority of the votes cast at a
meeting of shareholders, by the holders of shares, present in person or by
proxy, entitled to vote in the election.
(c) Each director shall hold office until the annual meeting of the shareholders
next succeeding his election, and until his successor is elected and qualified,
or until his prior death, resignation or removal.
Section 2- Duties and Powers:
The Board of Directors shall be responsible for the control and management of
the affairs, property and interests of the Corporation, and may exercise all
powers of the Corporation, except as are in the Certificate of Incorporation or
by statute expressly conferred upon or reserved to the shareholders.
Section 3- Annual and Regular Meetings: Notice:
(a) A regular annual meeting of the Board of Directors shall be held immediately
following the annual meeting of the shareholders, at the place of such annual
meeting of shareholders.
(b) The Board of Directors, from time to time, may provide by resolution for the
holding of other regular meetings of the Board of Directors, and may fix the
time and place thereof.
(c) Notice of any regular meeting of the Board of Directors shall not be
required to be given and, if given, need not specify the purpose of the meeting;
provided, however, that in case the Board of Directors shall fix or change the
time or place of any regular meeting, notice of such action shall be given to
each director who shall not have been present at the meeting at which such
action was taken within the time limited, and in the manner set forth in
paragraph (b) of Section 4 of this Article III, with respect to special
meetings, unless such notice shall be waived in the manner set forth in
paragraph (c) of such Section 4.
Section 4- Special Meetings: Notice:
(a) Special meetings of the Board of Directors shall be held whenever called by
the
By-Laws-3
<PAGE>
President or by one of the directors, at such time and place as may be specified
in the respective notices or waivers of notice thereof.
(b) Except as otherwise required by statute, notice of special meeting shall be
mailed directly to each director, addressed to him at his residence or usual
place of business, at least two (2) days before the day on which the meeting is
to be held, or shall be sent to him at such place by telegram, radio or cable,
or shall be delivered to him personally or given to him orally, not later than
the day before the day on which the meeting is to be held. A notice, or waiver
of notice, except as required by Section 8 of this Article III, need not specify
the purpose of the meeting.
(c) Notice of any special meeting shall not be required to be given to any
director who shall attend such meeting without protesting prior thereto or at
its commencement, the lack of notice to him, or who submits a signed waiver of
notice, whether before or after the meeting. Notice of any adjourned meeting
shall not be required to be given.
Section 5- Chairman:
At all meetings of the Board of Directors the Chairman of the Board, if any and
if present, shall preside. If there shall be no Chairman, or he shall be absent,
then the President shall preside, and in his absence, a Chairman chosen by the
directors shall preside.
Section 6- Quorum and Adjournments:
(a) At all meetings of the Board of Directors, the presence of a majority of the
entire Board shall be necessary and sufficient to constitute a quorum for the
transaction of business, except as otherwise provided by law, by the Certificate
of Incorporation, or by these By-Laws.
(b) A majority of the directors present at the time and place of any regular or
special meeting, although less than a quorum, may adjourn the same from time to
time without notice, until a quorum shall be present.
Section 7- Manner of Acting:
(a) At all meetings of the Board of Directors, each director present shall have
one vote, irrespective of the number of shares of stock, if any, which he may
hold.
(b) Except as otherwise provided by statute, by the Certificate of
Incorporation, or these ByLaws, the action of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors. Any action authorized in writing, by all of the directors
entitled to vote thereon and filed with the minutes of the corporation shall be
the act of the Board of Directors with the same force and effect as if the same
had been passed by unanimous vote at a duly called meeting of the Board.
Section 8- Vacancies:
Any vacancy in the Board of Directors occurring by reason of an increase in the
number of directors, or by reason of the death, resignation, disqualification,
removal (unless a vacancy created by the removal of a director by the
shareholders shall be filled by the shareholders at
By-Laws-4
<PAGE>
the meeting at which the removal was effected) or inability to act of any
director, or otherwise, shall be filled for the unexpired portion of the term by
a majority vote of the remaining directors, though less than a quorum, at any
regular meeting or special meeting of the Board of Directors called for that
purpose.
Section 9- Resignation:
Any director may resign at any time by giving written notice to the Board of
Directors, the President or the Secretary of the Corporation. Unless otherwise
specified in such written notice, such resignation shall take effect upon
receipt thereof by the Board of Directors or such officer, and the acceptance of
such resignation shall not be necessary to make it effective.
Section 10- Removal:
Any director may be removed with or without cause at any time by the affirmative
vote of shareholders holding of record in the aggregate at least a majority of
the outstanding shares of the Corporation at a special meeting of the
shareholders called for that purpose, and may be removed for caused by action of
the Board.
Section 11- Salary:
No stated shall be paid to directors, as such, for their services, but by
resolution of the Board of Directors a fixed sum and expenses of attendance, if
any, may be allowed for attendance at each regular or special meeting of the
Board; provided, however, that nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
Section 12- Contracts:
(a) No contract or other transaction between this Corporation and any other
Corporation shall be impaired, affected or invalidated, nor shall any director
be liable in any way by reason of the fact that any one or more of the directors
of this Corporation is or are interested in, or is a director or officer, or are
directors or officers of such other Corporation, provided that such facts are
disclosed or made known to the Board of Directors.
(b) Any director, personally and individually, may be a party to or may be
interested in any contract or transaction of this Corporation, and no director
shall be liable in any way by reason of such interest, provided that the fact of
such interest be disclosed or made known to the Board of Directors, and provided
that the Board of Directors shall authorize, approve or ratify such contract or
transaction by the vote (not counting the vote of any such director) of a
majority of a quorum, notwithstanding the presence of any such director at the
meeting at which such action is taken. Such director or directors may be counted
in determining the presence of a quorum at such meeting. This Section shall not
be construed to impair or invalidate or in any way affect any contract or other
transaction which would otherwise be valid under the law (common, statutory or
otherwise) applicable thereto.
Section 13- Committees:
The Board of Directors, by resolution adopted by a majority of the entire Board,
may from time to time designate from among its members an executive committee
and such other committees,
By-Laws-5
<PAGE>
and alternate members thereof, as they deem desirable, each consisting of three
or more members, with such powers and authority (to the extent permitted by law)
as may be provided in such resolution. Each such committee shall serve at the
pleasure of the Board.
ARTICLE IV - OFFICERS
Section 1- Number, Qualifications, Election and Term of Office:
(a) The officers of the Corporation shall consist of a President, a Secretary, a
Treasurer, and such other officers, including a Chairman of the Board of
Directors, and one or more Vice Presidents, as the Board of Directors may from
time to time deem advisable. Any officer other than the Chairman of the Board of
Directors may be, but is not required to be, a director of the Corporation. Any
two or more offices may be held by the same person.
(b) The officers of the Corporation shall be elected by the Board of Directors
at the regular annual meeting of the Board following the annual meeting of
shareholders.
(c) Each officer shall hold office until the annual meeting of the Board of
Directors next succeeding his election, and until his successor shall have been
elected and qualified, or until his death, resignation or removal.
Section 2- Resignation:
Any officer may resign at any time by giving written notice of such resignation
to the Board of Directors, or to the President or the Secretary of the
Corporation. Unless otherwise specified in such written notice, such resignation
shall take effect upon receipt thereof by the Board of Directors or by such
officer, and the acceptance of such resignation shall not be necessary to make
it effective.
Section 3- Removal:
Any officer may be removed, either with or without cause, and a successor
elected by a majority of the Board of Directors at any time.
Section 4- Vacancies:
A vacancy in any office by reason of death, resignation, inability to act,
disqualification, or any other cause, may at any time be filled for the
unexpired portion of the term by the Board of Directors.
Section 5- Duties of Officers:
Officers of the Corporation shall, unless otherwise provided by the Board of
Directors, each have such powers and duties as generally pertain to their
respective offices as well as such powers and duties as may be set forth in
these By-laws, or may from time to time be specifically conferred or imposed by
the Board. of Directors. The President shall be the chief executive officer of
the Corporation.
By-Laws-6
<PAGE>
Section 6- Sureties and Bonds:
In case the Board of Directors shall so require, any officer, employee or agent
of the Corporation shall execute to the Corporation a bond in such sum, and with
such surety or sureties as the Board of Directors may direct, conditioned upon
the faithful performance of his duties to the Corporation, including
responsibility for negligence and for the accounting for all property, funds or
securities of the Corporation which may come into his hands.
Section 7- Shares of Other Corporations:
Whenever the Corporation is the holder of shares of any other Corporation, any
right or power of the Corporation as such shareholder including the attendance,
acting and voting at shareholders' meetings and execution of waivers, consents,
proxies or other instruments) may be exercised on behalf of the Corporation by
the President, any Vice President, or such other person as the Board of
Directors may authorize.
ARTICLE V - SHARES OF STOCK
Section 1- Certificate of Stock:
(a) The certificates representing shares of the Corporation shall be in such
form as shall be adopted by the Board of Directors, and shall be numbered and
registered in the order issued. They shall bear the holder's name and the number
of shares, and shall be signed by (i) the Chairman of the Board or the President
or a Vice President, and (ii) the Secretary or Treasurer, or any Assistant
Secretary or Assistant Treasurer, and shall bear the corporate seal.
(b) No certificate representing shares shall be issued until the full amount of
consideration therefor has been paid, except as otherwise permitted by law.
(c) To the extent permitted by law, the Board of Directors may authorize the
issuance of certificates for fractions of a share which shall entitle the holder
to exercise voting rights, receive dividends and participate in liquidating
distributions, in proportion to the fractional holdings; or it may authorize the
payment in cash of the fair value of fractions of a share as of the time when
those entitled to receive such fractions are determined; or it may authorize the
issuance, subject to such conditions as may be permitted by law, of scrip in
registered or bearer form over the signature of an officer or agent of the
Corporation, exchangeable as therein provided for full shares, but such scrip
shall not entitle the holder to any rights of a shareholder, except as therein
provided.
Section 2- Lost or Destroyed Certificates:
The holder of any certificate representing shares of the Corporation shall
immediately notify the Corporation of any loss or destruction of the certificate
representing the same. The Corporation may issue a new certificate in the place
of any certificate theretofore issued by it, alleged to have been lost or
destroyed. On production of such evidence of loss or destruction as the Board of
Directors in its discretion may require, the Board of Directors may, in its
discretion, require the owner of the lost or destroyed certificate, or his legal
representatives, to give the Corporation a bond in such sum as the Board may
direct, and with such surety or sureties as may be satisfactory to the Board, to
indemnify the Corporation against any claims, loss, liability or damage it may
suffer on account of the issuance of the new certificate. A new certificate
By-Laws-7
<PAGE>
may be issued without requiring any such evidence or bond when, in the judgment
of the Board of Directors, it is proper so to do.
Section 3- Transfers of Shares:
(a) Transfers of shares of the Corporation shall be made on the share records of
the Corporation only by the holder of record thereof, in person or by his duly
authorized attorney, upon surrender for cancellation of the certificate or
certificates representing such shares, with an assignment or power of transfer
endorsed thereon or delivered therewith, duly executed, with such proof of the
authenticity of the signature and of authority to transfer and of payment of
transfer taxes as the Corporation or its agents may require.
(b) The Corporation shall be entitled to treat the holder of record of any share
or shares as the absolute owner thereof for all purposes and, accordingly, shall
not be bound to recognize any legal, equitable or other claim to, or interest
in, such share or shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise expressly
provided by law.
Section 4- Record Date:
In lieu of closing the share records of the Corporation, the Board of Directors
may fix, in advance, a date not exceeding fifty days, nor less than ten days, as
the record date for the determination of shareholders entitled to receive notice
of, or to vote at, any meeting of shareholders, or to consent to any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividends, or allotment of any rights, or for the purpose
of any other action. If no record date is fixed, the record date for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if no notice is given, the day on which the
meeting is held; the record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the resolution of
the directors relating thereto is adopted. When a determination of shareholders
of record entitled to notice of or to vote at any meeting of shareholders has
been made as provided for herein, such determination shall apply to any
adjournment thereof, unless the directors fix a new record date for the
adjourned meeting.
ARTICLE VI - DIVIDENDS
Subject to applicable law, dividends may be declared and paid out of any funds
available therefor, as often, in such amounts, and at such time or times as the
Board of Directors may determine.
ARTICLE VIl - FISCAL YEAR
The fiscal year of the Corporation shall be fixed by the Board of Directors from
time to time, subject to applicable law.
ARTICLE VIII - CORPORATE SEAL
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The corporate seal, if any, shall be in such form as shall be approved from time
to time by the Board of Directors.
ARTICLE IX - AMENDMENTS
Section 1- By Shareholders:
All by-laws of the Corporation shall be subject to alteration or repeal, and new
by-laws may be made, by the affirmative vote of shareholders holding of record
in the aggregate at least a majority of the outstanding shares entitled to vote
in the election of directors at any annual or special meeting of shareholders,
provided that the notice or waiver of notice of such meeting shall have
summarized or set forth in full therein, the proposed amendment.
Section 2- By Directors:
The Board of Directors shall have power to make, adopt, alter, amend and repeal,
from time to time, by-laws of the Corporation; provided, however, that the
shareholders entitled to vote with respect thereto as in this Article IX
above-provided may alter, amend or repeal by-laws made by the Board of
Directors, except that the Board of Directors shall have no power to change the
quorum for meetings of shareholders or of the Board of Directors, or to change
any provisions of the by-laws with respect to the removal of directors or the
filling of vacancies in the Board resulting from the removal by the
shareholders. If any by-law regulating an impending election of directors is
adopted, amended or repealed by the Board of Directors, there shall be set forth
in the notice of the next meeting of shareholders for the election of directors,
the by-law so adopted, amended or repealed, together with a concise statement of
the changes made.
ARTICLE X - INDEMNITY
(a) Any person made a party to any action, suit or proceeding, by reason of the
fact that he, his testator or intestate representative is or was a director,
officer or employee of the Corporation, or of any Corporation in which he served
as such at the request of the Corporation, shall be indemnified by the
Corporation against the reasonable expenses, including attorney's fees, actually
and necessarily incurred by him in connection with the defense of such action,
suit or proceedings, or in connection with any appeal therein that such officer,
director or employee is liable for negligence or misconduct in the performance
of his duties.
(b) The foregoing right of indemnification shall not be deemed exclusive of any
other rights to which any officer or director or employee may be entitled apart
from the provisions of this section.
(c) The amount of indemnity to which any officer or any director may be entitled
shall be fixed by the Board of Directors, except that in any case where there is
no disinterested majority of the Board available, the amount shall be fixed by
arbitration pursuant to then existing rules of the American Arbitration
Association.
By-Laws-9
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OHS DRAFT
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VCS TECHNOLOGIES, INC.
AND
GILFORD SECURITIES INCORPORATED
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of , 1998
- -------------------------------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of , 1998
between VCS TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and
GILFORD SECURITIES INCORPORATED (hereinafter referred to variously as the
"Holder" or "Holders" or the "Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative warrants
("Warrants") to purchase up to an aggregate 100,000 shares of Common Stock,
$0.01 par value, of the Company; and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between
the Company and the several Underwriters listed therein to act as the
Representative in connection with the Company's proposed public offering of up
to 1,000,000 shares of Common Stock at a public offering price of $ per
share of Common Stock (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the
Representative acting as the Representative pursuant to the Underwriting
Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate ten dollars ($10.00), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
<PAGE>
1. Grant. The Representative (or its designees) is hereby granted the
right to purchase, at any time from , 1999 [twelve months after date
of this Agreement], until 5:30 P.M., New York time, on , 2003 [five
years after date of this Agreement], up to an aggregate of 100,000 shares of
Common Stock at an initial exercise price (subject to adjustment as provided
in Section 8 hereof) of $ per share of Common Stock [120% of initial public
offering price per share of Common Stock], subject to the terms and conditions
of this Agreement. Except as set forth herein, the shares of Common Stock are
in all respects identical to the shares of Common Stock being purchased by the
Underwriters for resale to the public pursuant to the terms and provisions of
the Underwriting Agreement. The shares of Common Stock are sometimes
hereinafter referred to collectively as the "Securities."
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall
be in the form set forth in Exhibit A, attached hereto and made a part hereof,
with such appropriate insertions, omissions, substitutions, and other
variations as required or permitted by this Agreement.
3. Exercise of Warrant.
Section 3.1 Method of Exercise. The Warrants initially are
exercisable at an aggregate initial exercise price (subject to adjustment as
provided in Section 8 hereof) per share of Common Stock set forth in Section 6
hereof payable by certified or official bank check in New York Clearing House
funds, subject to adjustment as provided in Section 8 hereof. Upon surrender
of a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the shares of Common Stock purchased at the Company's principal executive
offices (presently located at 456 Glenbrook Road, Stamford, Connecticut 06906)
the registered holder of a Warrant Certificate
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<PAGE>
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder thereof, in whole or in part (but not as to fractional shares of the
Common Stock). Warrants may be exercised to purchase all or part of the shares
of Common Stock. In the case of the purchase of less than all the shares of
Common Stock purchasable under any Warrant Certificate, the Company shall
cancel said Warrant Certificate upon the surrender thereof and shall execute
and deliver a new Warrant Certificate of like tenor for the balance of the
shares of Common Stock purchasable thereunder.
Section 3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, the Holder(s) of the Warrants shall have the right at any
time and from time to time to exercise the Warrants in full or in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1
hereof. The number of shares of Common Stock to be issued pursuant to this
Section 3.2 shall be equal to the difference between (a) the number of shares
of Common Stock in respect of which the Warrants are exercised and (b) a
fraction, the numerator of which shall be the number of shares of Common Stock
in respect of which the Warrants are exercised multiplied by the Exercise
Price and the denominator of which shall be the Market Price (as defined in
Section 3.3 hereof) of the shares of Common Stock. Solely for the purposes of
this paragraph, Market Price shall be calculated either (i) on the date on
which the form of election attached hereto is deemed to have been sent to the
Company pursuant to Section 14 hereof ("Notice Date") or (ii) as the average
of the Market Prices for each of the five trading days preceding the Notice
Date, whichever of (i) or (ii) is greater.
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<PAGE>
Section 3.3 Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be when referring to the Common
Stock, the last reported sale price, or, in case no such reported sale takes
place on such day, the average of the last reported sale prices for the last
three (3) trading days, in either case as officially reported by the principal
securities exchange on which the Common Stock is listed or admitted to trading
or by the American Stock Exchange ("Amex") or by the National Association of
Securities Dealers Automated Quotation System ("Nasdaq"), or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted by Nasdaq, the average closing bid price as furnished by the
National Association of Securities Dealers, Inc. ("NASD") through Nasdaq or
similar organization if Nasdaq is no longer reporting such information, or if
the Common Stock is not quoted on Nasdaq, as determined in good faith (using
customary valuation methods) by resolution of the members of the Board of
Directors of the Company, based on the best information available to it.
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock and/or other securities,
properties or rights underlying such Warrants shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the
Holder thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name other than that of the Holder, and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have
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<PAGE>
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the shares
of Common Stock (and/or other securities, property or rights issuable upon the
exercise of the Warrants) shall be executed on behalf of the Company by the
manual or facsimile signature of the then Chairman or Vice Chairman of the
Board of Directors or President or Vice President of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer. Certificates
representing the shares of Common Stock (and/or other securities, property or
rights issuable upon exercise of the Warrants) shall be dated as of the Notice
Date (regardless of when executed or delivered) and dividend bearing
securities so issued shall accrue dividends from the Notice Date.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for a period of
one (1) year from the date hereof, except to officers of the Representative.
6. Exercise Price.
Section 6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $ per share of Common Stock [120% of the initial public offering price
of the Common Stock]. The adjusted exercise price shall be the price which
shall result from time to time from any and all adjustments of the initial
exercise price in accordance with the provisions of Section 8 hereof. Any
transfer of a Warrant shall constitute an automatic transfer and assignment of
the registration rights set forth
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<PAGE>
in Section 7 hereof with respect to the Securities or other securities,
properties or rights underlying the Warrants.
Section 6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context or unless otherwise specified.
7. Registration Rights.
Section 7.1 Registration Under the Securities Act of 1933. The
Warrants and the shares of Common Stock or other securities issuable upon
exercise of the Warrants (collectively, the "Warrant Securities") have not
been registered under the Securities Act of 1933, as amended (the "Act"). Upon
exercise, in part or in whole, of the Warrants, certificates representing the
Warrant Securities shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), and
may not be offered or sold except pursuant to (i) an effective
registration statement under the Act, (ii) to the extent applicable,
Rule 144 under the Act (or any similar rule under such Act relating
to the disposition of securities), or (iii) an opinion of counsel, if
such opinion shall be reasonably satisfactory to counsel to the
issuer, that an exemption from registration under such Act is
available.
Section 7.2 Piggyback Registration. If, at any time commencing after
the date hereof and expiring seven (7) years thereafter, the Company proposes
to register any of its securities under the Act (other than pursuant to Form
S-4, Form S-8 or a comparable registration statement) it will give written
notice by registered mail, at least thirty (30) days prior to the filing of
each such registration statement, to the Representative and to all other
Holders of the Warrants and/or the Warrant Securities of its intention to do
so. If the Representative or other Holders of the Warrants and/or Warrant
Securities notify the Company within twenty (20) business days
6
<PAGE>
after receipt of any such notice of its or their desire to include any such
securities in such proposed registration statement, the Company shall afford
the Representative and such Holders of the Warrants and/or Warrant Securities
the opportunity to have any such Warrant Securities registered under such
registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant
to this Section 7.2 (irrespective of whether a written request for inclusion
of any such securities shall have been made) to elect not to file any such
proposed registration statement, or to withdraw the same after the filing but
prior to the effective date thereof.
Section 7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring five
(5) years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities
(assuming the exercise of all of the Warrants) shall have the right (which
right is in addition to the registration rights under Section 7.2 hereof),
exercisable by written notice to the Company, to have the Company prepare and
file with the Securities and Exchange Commission (the "Commission"), on one
occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Representative and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
respective Warrant Securities for nine (9) consecutive months by such Holders
and any other Holders of the Warrants and/or Warrant Securities who notify the
Company within ten (10) days after receiving notice from the Company of such
request.
7
<PAGE>
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 (whether such request is made
pursuant to Section 7.3(a) or 7.3(c) hereof) by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and
Section 7.3(a), at any time commencing after the date hereof and expiring five
(5) years thereafter, any Holder(s) of Warrants and/or Warrant Securities
shall have the right, exercisable by written request to the Company, to have
the Company prepare and file with the Commission, on one occasion, a
registration statement so as to permit a public offering and sale for nine (9)
consecutive months by any such Holder(s) of its or their Warrants and/or
Warrant Securities; provided, however, that the provisions of Section 7.4(b)
hereof shall not apply to any such registration request and all costs incident
thereto shall be at the expense of the Holders) making such request.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant
Securities within the time period specified in Section 7.4(a) hereof pursuant
to the written notice specified in Section 7.3(a) of a Majority of the Holders
of the Warrants and/or Warrant Securities, the Company may, at its option,
upon the written notice of election of a Majority of the Holders of the
Warrants and/or Warrant Securities requesting such registration, repurchase
(i) any and all Warrant Securities of such Holders at the higher of the Market
Price per share of Common Stock, determined as of (x) the date of the notice
sent pursuant to Section 7.3(a) or (y) the expiration of the period specified
in Section 7.4(a) and (ii) any and all Warrants of such Holders at such Market
Price less the Exercise Price of such Warrant. Such repurchase shall be in
immediately available funds and
8
<PAGE>
shall close within two (2) days after the later of (i) the expiration of the
period specified in Section 7.4(a) or (ii) the delivery of the written notice
of election specified in this Section 7.3(d).
Section 7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Securities such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses.
(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws
of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each person,
if any, who controls such Holders
9
<PAGE>
within the meaning of Section 15 of the Act or Section 20(a) of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim,
damage, expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act or otherwise,
arising from such registration statement but only to the same extent and with
the same effect as the provisions pursuant to which the Company has agreed to
indemnify each of the Underwriters contained in Section 7 of the Underwriting
Agreement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each
person, if any, who controls the Company within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their
successors or assigns, for specific inclusion in such registration statement
to the same extent and with the same effect as the provisions contained in
Section 7 of the Underwriting Agreement pursuant to which the Underwriters
have agreed to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities
other than the Warrant Securities to be included in any registration statement
filed pursuant to Section 7.3
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hereof, or permit any other registration statement to be or remain effective
during the effectiveness of a registration statement filed pursuant to Section
7.3 hereof (other than (i) shelf registrations effective prior thereto and
(ii) registrations on Form S-4 or S-8), without the prior written consent of
the Holders of the Warrants and Warrant Securities representing a Majority of
such securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement) relating to the due incorporation of
the Company, the validity of the shares being issued, the due execution and
delivery of the underwriting agreement and Rule 10b-5, and (ii) a "cold
comfort" letter dated the effective date of such registration statement (and,
if such registration includes an underwritten public offering, a letter dated
the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, covering
substantially the same matters with respect to such registration statement
(and the prospectus included therein) and, with respect to events subsequent
to the date of such financial statements, as are customarily covered in
accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
make "generally available to its security holders" (within the meaning of Rule
158 under the Act) an earnings statement
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(which need not be audited) complying with Section 11(a) of the Act and
covering a period of at least 12 consecutive months beginning after the
effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder participating
in the offering requesting the correspondence and memoranda described below
and to the managing underwriters, copies of all correspondence between the
Commission and the Company, its counsel or auditors and all memoranda relating
to discussions with the Commission or its staff with respect to the
registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the NASD. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable
times and as often as any such Holder or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested pursuant to Section 7.3(a) to be
included in such underwriting, which may be the Representative. Such agreement
shall be satisfactory in form and substance to the Company, each Holder and
such managing underwriter(s), and shall contain such representations,
warranties and covenants by the Company and such other terms as are
customarily contained in agreements of that type used by the managing
underwriter(s). The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Warrant Securities whether pursuant
to Section 7.2 or Section 7.3(a) and may, at their option, require that any or
all of the representations, warranties and covenants of the Company to or for
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the benefit of such underwriter(s) shall also be made to and for the benefit
of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriter(s) except as they may relate to such Holders and their intended
methods of distribution.
(l) For purposes of this Agreement, the term "Majority" in reference
to the Holders of Warrants or Warrant Securities, shall mean in excess of
fifty percent (50%) of the then outstanding Warrants or Warrant Securities
that (i) are not held by the Company, an affiliate, officer, creditor,
employee or agent thereof or any of their respective affiliates, members of
their family, persons acting as nominees or in conjunction therewith and (ii)
have not been resold to the public pursuant to a registration statement filed
with the Commission under the Act.
8. Adjustments to Exercise Price and Number of Securities.
Section 8.1 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
Section 8.2 Stock Dividends and Distributions. In case the Company
shall pay a dividend in, or make a distribution of, shares of Common Stock or
of the Company's capital stock convertible into Common Stock, the Exercise
Price shall forthwith be proportionately decreased. An adjustment made
pursuant to this Section 8.2 shall be made as of the record date for the
subject stock dividend or distribution.
Section 8.3 Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Section 8, the number
of Warrant Securities issuable upon
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<PAGE>
the exercise at the adjusted exercise price of each Warrant shall be adjusted
to the nearest full amount by multiplying a number equal to the Exercise Price
in effect immediately prior to such adjustment by the number of Warrant
Securities issuable upon exercise of the Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise
Price.
Section 8.4 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock
designated as Common Stock in the Certificate of Incorporation of the Company
as may be amended as of the date hereof, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value,
or from no par value to par value.
Section 8.5 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company
into, another corporation (other than a consolidation or merger which does not
result in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver
to the Holder a supplemental warrant agreement providing that the holder of
each Warrant then outstanding or to be outstanding shall have the right
thereafter (until the expiration of such Warrant) to receive, upon exercise of
such Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the
number of securities of the Company for which such Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall
be identical to the adjustments
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provided in Section 8. The above provision of this subsection shall similarly
apply to successive consolidations or mergers.
Section 8.6 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made if the amount of said
adjustment shall be less than two cents (2?) per Warrant Security, provided,
however, that in such case any adjustment that would otherwise be required
then to be made shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least two cents (2?) per
Warrant Security.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations
as shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of the
Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common
Stock upon the exercise of the Warrants, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction
15
<PAGE>
up to the nearest whole number of shares of Common Stock or other securities,
properties or rights.
11. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price
therefor, all shares of Common Stock, and other securities issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the Warrants
shall be outstanding, the Company shall use its best efforts to cause all
shares of Common Stock issuable upon the exercise of the Warrants to be listed
(subject to official notice of issuance) on all securities exchanges on which
the Common Stock issued to the public in connection herewith may then be
listed and/or quoted on the Amex or Nasdaq.
12. Notices to Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any
time prior to the expiration of the Warrants and their exercise, any of the
following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive
a dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution
16
<PAGE>
payable otherwise than out of current or retained earnings or
capital surplus (in accordance with applicable law), as indicated by
the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to subscribe
therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale
of all or substantially all of its property, assets and business as
an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the
case may be. Failure to give such notice or any defect therein shall not
affect the validity of any action taken in connection with the declaration or
payment of any such dividend, or the issuance of any convertible or
exchangeable securities, or subscription rights, options or warrants, or any
proposed dissolution, liquidation, winding up or sale.
13. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made and sent when
delivered, or mailed by registered or certified mail, return receipt
requested:
17
<PAGE>
(a) If to the registered Holder of the Warrants, to the address
of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
hereof or to such other address as the Company may designate by
notice to the Holders.
14. Supplements and Amendments. The Company and the Representative
may from time to time supplement or amend this Agreement without the approval
of any Holders of Warrant Certificates (other than the Representative) in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or
to make any other provisions in regard to matters or questions arising
hereunder which the Company and the Representative may deem necessary or
desirable and which the Company and the Representative deem shall not
adversely affect the interests of the Holders of Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of
business on , 2005. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until
the close of business on , 2011.
17. Governing Law; Submission to Jurisdiction. This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State without giving effect to
the rules of said State governing the conflicts of laws.
18
<PAGE>
The Company, the Representative and the Holders hereby agree that
any action, proceeding or claim against it arising out of, or relating in any
way to, this Agreement shall be brought and enforced in the courts of the
State of New York or of the United States of America for the Southern District
of New York, and irrevocably submits to such jurisdiction, which jurisdiction
shall be exclusive. The Company, the Representative and the Holders hereby
irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum. Any such process or summons to be served upon any of the Company, the
Representative and the Holders (at the option of the party bringing such
action, proceeding or claim) may be served by transmitting a copy thereof, by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 13 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon the party
so served in any action, proceeding or claim. The Company, the Representative
and the Holders agree that the prevailing party(ies) in any such action or
proceeding shall be entitled to recover from the other party(ies) all of
its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefore.
18. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to
the subject matter hereof and may not be modified or amended except by a
writing duly signed by the party against whom enforcement of the modification
or amendment is sought.
19. Severability. If any provision of this Agreement shall be held
to be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
19
<PAGE>
20. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive
effect.
21. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Warrant Certificates
or Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
the Representative and any other registered Holders of Warrant Certificates or
Warrant Securities.
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and
the same instrument.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
VCS TECHNOLOGIES, INC.
By:
------------------------------
Name:
Title:
Attest:
- -----------------------
Secretary
GILFORD SECURITIES INCORPORATED
By:
------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT
AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ___________, 2003
No. W- Warrants to Purchase
____ shares of Common
Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that _____________, or registered
assigns, is the registered holder of _________ Warrants to purchase initially,
at any time from _________, 1999 until 5:30 p.m. New York time on __________,
2003 ("Expiration Date"), up to __________ fully-paid and non-assessable shares
of common stock, $0.01 par value ("Common Stock"), of VCS TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), at the initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $_____ per share of
Common Stock upon surrender of this Warrant Certificate and payment of the
Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the warrant agreement dated as of _________,
1998 between the Company and GILFORD SECURITIES INCORPORATED (the "Warrant
Agreement"). Payment of the Exercise Price shall be made by certified or
official bank check in New York Clearing House funds payable to the order of the
Company or by surrender of this Warrant Certificate.
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a
duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the
registered holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the
rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate
or Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as
the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and
for all other purposes, and the Company shall not be affected by any notice to
the contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be duly executed under its corporate seal.
Dated as of _____________, 1998
VCS TECHNOLOGIES, INC.
By:
-----------------------------
Name:
Title:
4
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] ___________ shares of Common Stock;
and herewith tenders in payment for such securities a certified or official
bank check payable in New York Clearing House Funds to the order of VCS
Technologies, Inc. in the amount of $_______________________, all in
accordance with the terms of Section 3.1 of the Representative's Warrant
Agreement dated as of _________, 1998 between VCS Technologies, Inc. and
Gilford Securities Incorporated The undersigned requests that a certificate
for such securities be registered in the name of ___________________________
whose address is ___________________________ and that such Certificate be
delivered to _____________________ whose address is _________________________.
Dated:
Signature
------------------------------
(Signature must conform in all respects
to name of holder as specified on
the face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
5
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] ___________ shares of Common Stock;
and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of ________, 1998 between VCS Technologies, Inc. and
Gilford Securities Incorporated. The undersigned requests that a certificate
for such securities be registered in the name of ____________________________
whose address is ________________________________ and that such Certificate be
delivered to ______________________ whose address is _________________________.
Dated:
Signature
------------------------------
(Signature must conform in all respects
to name of holder as specified on
the face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
6
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ________________________ hereby sells, assigns
and transfers unto
_______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________________________
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated:
Signature
------------------------------
(Signature must conform in all respects
to name of holder as specified on
the face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
7
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (1) A REGISTRATION
STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT
WITH RESPECT TO THESE SECURITIES, OR (2) PURSUANT TO A SPECIFIC
EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER
HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE
COMPANY, OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT
THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS
OF THE ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE
SECURITIES LAW.
VCS TECHNOLOGIES, INC.
UNSECURED FIXED-TERM PROMISSORY NOTE
$600,000.00 August 12, 1998
1. Promise to Pay. For value received, VCS Technologies, Inc., a Delaware
corporation (the "Company"), promises to pay to the order of Chaim Sieger or
his assigns (the "Holder") at such place as the Holder may designate from time
to time, the principal amount of six hundred thousand dollars ($600,000).
Simple interest shall accrue on the unpaid principal amount hereof at the rate
of fourteen percent (14%) per annum (computed on the basis of a 360-day year
of twelve thirty-day months), such interest to begin accruing on the date
thirty (30) days prior to the "First Payment Date" (as defined below). The
aggregate sum of the principal amount hereof and all accrued and unpaid
interest shall be paid to the Holder in sixty (60) equal monthly payments, the
first payment due on the First Payment Date.
2. Certain Definitions. The term "IPO Closing" means the receipt by the
Company of all of the net proceeds resulting from the Company's proposed
initial public offering of securities. The term "First Payment Date" means (i)
if the IPO Closing occurs on or prior to November 30, 1998, then the first
business day of the second full calendar month following the IPO Closing; or
(ii) if the IPO Closing does not occur on or prior to November 30, 1998, then
January 15, 1999.
3. Waiver of Notice. The Company waives presentment for payment, demand for
payment, notice of nonpayment, notice of protest, protest, and notice of
dishonor of this Term Note, and consents to and authorizes the Holder, without
notice, to grant extensions of time for payment, renew, extend, modify, waive,
accelerate, compromise, settle or release any obligation of any party
obligated hereunder, from time to time. The Holder shall not by any act of
omission or commission be deemed to waive any of his or its rights or remedies
hereunder unless such waiver be in writing and signed by the Holder and then
only to the extent specifically set forth therein; a waiver of one event shall
not be construed as continuing or as a bar or waiver of such right or remedy
on a subsequent event.
4. Prepayment. The Company shall have the right to prepay all or part of the
outstanding principal amount hereof at any time without penalty.
5. New York Law. This Term Note is made in the State of New York and shall be
governed, construed, and interpreted as to validity, enforceability, and in
all other respects in accordance with the laws of the State of New York.
6. Right to Cure. The Company shall have the right to cure any monetary
default within ten (10) days from the date any payment is due.
7. No Unlawful Interest. Anything herewith contained to the contrary
notwithstanding, the
<PAGE>
Company does not agree and shall not be obligated to pay any amounts which
would render this obligation usurious or otherwise unlawful. The Company
agrees to pay the maximum amount permitted by law in the event that any
amounts provided in this Term Note exceed the maximum amount permitted by law.
8. Binding Effect. The provisions of this Term Note are binding on the assigns
and successors of the Company and shall inure to the benefit of the Holder and
his assigns.
9. Non-Negotiable. The Holder agrees that this Term Note is non-negotiable,
and may only be transferred in accordance with the laws of descent and
distribution.
10. No Conversion. This Term Note is not convertible into any other securities
of the Company.
IN WITNESS WHEREOF, the Company has caused this Term Note to be
signed as of the date set forth above.
VCS Technologies, Inc.
/s/ William Wheaton III
---------------------------
William Wheaton III
President
<PAGE>
Preferred Stock Purchase Agreement (the "Agreement") effective as of
September 16, 1998 by and between VCS Technologies, Inc. (the "Company"), and
William E. Wheaton III ("Wheaton"). The Company and Wheaton may be referred to
herein collectively as the "Parties" or individually as a "Party."
In consideration of the promises and the mutual covenants contained
herein, the Parties hereby agree as follows:
1 Company Obligation. The Parties acknowledge that the Company is obligated to
pay to Wheaton for accrued salary, commissions and reimbursable expenses the
aggregate amount of $371,582 (the "Company Obligation").
2 Purchase of Preferred Stock. Effective as of the date hereof, Wheaton hereby
agrees to purchase from the Company, and the Company agrees to sell to
Wheaton, 3,716 shares of the Company's Series A Preferred Stock (the "Series A
Shares") for an aggregate purchase price of $371,582. As payment for the
Series A Shares purchased hereby, Wheaton has waived payment of the Company
Obligation. The Company shall deliver to Wheaton a certificate representing
the Series A Shares as soon as practicable following the date of this
Agreement.
3 Representations and Warranties of the Company. The Company represents and
warrants to Wheaton as follows:
3.1 The Company is duly organized, validly existing and in good standing
under the laws of the state of Delaware with full power and authority to
operate its business as currently conducted.
3.2 The authorized capital stock of the Company consists of 9,990,000
shares of Common Stock and 10,000 shares of Preferred Stock. Each outstanding
share of Common Stock is duly authorized, validly issued, fully paid and
non-assessable, and has not been issued and is not owned or held in violation
of any preemptive rights of stockholders. No shares of Preferred Stock are
currently outstanding. As soon as practicable following the date of this
Agreement, the Company shall take such corporate actions and shall make such
filings with the Secretary of State of the State of Delaware as may be
necessary to authorize, designate and issue the Series A Shares in accordance
with this Agreement.
3.3 The Company has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. This Agreement has been duly
authorized by the Company and, when executed and delivered by the Company will
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
3.4 Except as set forth in Section 3.2 above, no consent, authorization,
approval, order, license, certificate or permit of or from, or declaration or
filing with, any federal, state, local or other governmental authority, or any
court or any other tribunal, is required by the Company for the execution,
delivery or performance by the Company under this Agreement (except for such
filings as may be required under federal and state securities laws).
4 Representations and Warranties of Wheaton. Wheaton hereby represents and
warrants to the Company as follows:
4.1 Wheaton is a bona fide resident of the state set forth in Section 7.3
of this Agreement and is legally competent to execute this Agreement.
4.2 Wheaton has received, read carefully and is familiar with this
Agreement. Respecting the Company, Wheaton is familiar with the Company's
business and financial condition and any other matters relating to the
transactions contemplated hereby; Wheaton has received all materials which
have been requested by him, has had a reasonable opportunity to ask questions
of the Company and its representatives, and the Company has answered all
inquiries that Wheaton has put to it. Wheaton has taken all the steps
necessary to evaluate the merits and risks of the transactions effected
hereby.
<PAGE>
4.3 Wheaton has been advised by the Company to consider retaining legal
counsel in connection with the preparation and the execution of this
Agreement.
4.4 Wheaton represents that he is an "accredited investor" as such term
is defined in Rule 501 of the Rules and Regulations promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
4.5 Wheaton has such knowledge and experience in finance, securities,
investments and other business matters so as to be able to evaluate the merits
and risks of his investment in the Company.
4.6 Wheaton has adequate means of providing for his current and
foreseeable future needs and has no need for liquidity of his investment in
the Company. Wheaton recognizes and is fully cognizant of the fact that his
investment in the Company involves a high degree of risk, and Wheaton
represents that he can afford to bear such risk, including, without
limitation, the risk of losing the entire investment.
4.7 Wheaton has been advised by the Company that (i) the Series A Shares
purchased hereby and the shares of Common Stock into which the Series A Shares
may be converted (collectively, the "Securities") have not been registered
under the Securities Act, and that the Securities will be issued on the basis
of the statutory exemption provided by Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or both, relating to transactions by an
issuer not involving any public offering, and under similar exemptions under
applicable state securities laws; (ii) none of the Securities have been
registered or qualified with any federal or state agency or self-regulatory
organization, and (iii) the Company's reliance on exemptions from federal and
state registration or qualification requirements is based in part upon the
representations made by Wheaton contained in this Agreement.
4.8 Wheaton has been advised by the Company of, and/or he is otherwise
familiar with, the nature of the limitations on the transfer of the Securities
imposed by the Securities Act and the Rules and Regulations promulgated
thereunder. In particular, Wheaton agrees that no sale, assignment or transfer
of any of the Securities shall be valid or effective (and agrees to not so
sell, assign or transfer any of the Securities), and the Company shall not be
required to give any effect to such a sale, assignment or transfer, unless the
sale, assignment or transfer is (i) registered under the Securities Act, it
being understood that none of the Securities are currently registered for
sale; or (ii) made in accordance with all the requirements and limitations of
Rule 144 under the Securities Act. Wheaton acknowledges that the Securities
shall be subject to a stop transfer order and that the certificate or
certificates evidencing the Securities shall bear the following legend (and
such other legends as may be required by state blue sky laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (1) A REGISTRATION
STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT
WITH RESPECT TO THESE SECURITIES, OR (2) PURSUANT TO A SPECIFIC
EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER
HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE
COMPANY, OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT
THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS
OF THE ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE
SECURITIES LAW.
4.9 Wheaton is acquiring the Securities for his own account for
investment and not with a view to the sale or distribution thereof or the
granting of any participation therein. Wheaton has no present intention of
distributing or selling to others any of such interest or granting any
participation therein.
2
<PAGE>
4.10 It never has been represented, guaranteed or warranted by any of the
Company, the Company's officers, directors, stockholders, employees or agents,
or any other person, whether expressly or by implication, that (i) the Company
or Wheaton will realize any given percentage of profits and/or amount or type
of consideration, profit or loss as a result of the Company's activities or
Wheaton's investment; or (ii) the past performance or experience of the
management of the Company, or of any other person, will in any way indicate
the predictable results of the Company's activities or the ownership of the
Securities.
4.11 Wheaton is not acquiring the Securities as a result of or subsequent
to any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, or
presented at any seminar or meeting, or any solicitation of a share exchange
by a person other than a representative of the Company with whom Wheaton had a
pre-existing relationship.
4.12 Wheaton is not relying on the Company with respect to the tax and
other economic considerations of an investment.
5 Indemnification.
5.1 Survival of Representations and Warranties. The representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and shall continue forever thereafter.
5.2 Indemnification for the Benefit of the Company. Wheaton acknowledges
that he understands the meaning and legal consequences of the representations
and warranties contained in Section 4 hereof, and agrees to indemnify and hold
harmless the Company and each of the Company's officers, directors, employees
and agents from and against any and all loss, damage or liability due to or
arising out of a breach of any such representation or warranty.
5.3 Indemnification for the Benefit of Wheaton. The Company acknowledges
that it understands the meaning and legal consequences of the representations
and warranties contained in Section 3 hereof, and agrees to indemnify and hold
harmless Wheaton and each of Wheaton's officers, directors, employees and
agents from and against any and all loss, damage or liability due to or
arising out of a breach of any such representation or warranty.
6 Company's Right of First Purchase. For such time until the date prior to the
effective date of the registration statement filed in connection with the
Company's initial public offering, any shares of Common Stock held by Wheaton
(including, but not limited to, any of the Securities) will be subject to the
Company's right of first purchase. By virtue of that right, (a) such shares of
Common Stock may not be transferred during Wheaton's lifetime to any person
other than members of Wheaton's Immediate Family (as defined below), a
partnership whose members are Wheaton's and/or members of Wheaton's Immediate
Family, or a trust for the benefit of Wheaton and/or members of Wheaton's
Immediate Family, unless such transfer occurs within the 30 days immediately
following either (i) the expiration of 30 days following written notice by
Wheaton to the Company identifying the prospective transferee and offering the
Company the first opportunity to purchase such stock at its Fair Market Value
(as defined below) in cash; or (ii) the Company's election to not purchase
such shares of Common Stock after receipt of such notice; and (b) upon
Wheaton's death, the Company will have the right to purchase all or some of
such stock at its Fair Market Value within nine months after the date of
death. This right of first purchase will continue to apply to any such shares
of Common Stock after the transfer during Wheaton's lifetime of such shares of
Common Stock to a member of Wheaton's Immediate Family or to a family
partnership or trust as aforesaid, and after any transfer of such shares of
Common Stock with respect to which the the Company expressly waived its right
of first purchase without also waiving it as to any subsequent transfers
thereof, but it will not apply after a transfer of such shares of Common Stock
with respect to which the Company was offered but did not exercise or waive
its right of first purchase or more than nine months after Wheaton's death.
The Company may assign all or any portion of its right of first purchase to
any one or more of its stockholders, or to a
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pension or retirement plan or trust for employees of the Company, who may then
exercise the right so assigned. The Company's right of first purchase shall
terminate on the date prior to the effective date of the registration
statement filed in connection with the Company's initial public offering.
6.1 Certain Definitions. In addition to the terms defined elsewhere in
this Agreement, the following terms will have the following definitions:
6.1.1 Fair Market Value. The "Fair Market Value" of Common Stock will
mean the price at which one could reasonably expect such stock to be sold in
an arm's length transaction, for cash, other than on an installment basis, to
a person not employed by, controlled by, in control of or under common control
with the issuer of such stock. Such Fair Market Value will be that which has
currently or most recently been determined for this purpose by the Board of
Directors of the Company, or at the sole discretion of the Board by an
independent appraiser or appraisers selected by the Board, in either case
giving due consideration to recent transactions involving shares of such
stock, if any, the issuer's net worth, prospective earning power and
dividend-paying capacity, the goodwill of the issuer's business, the issuer's
industry position and its management, that industry's economic outlook, the
values of securities of issuers whose stock is publicly traded and which are
engaged in similar businesses, the effect of transfer restrictions to which
such stock may be subject under law and under the applicable terms of any
contract governing such stock, the absence of a public market for such stock
and such other matters as the Board or its appraiser or appraisers deem
pertinent. The determination by the Board or its appraiser or appraisers of
the Fair Market Value will be conclusive and binding notwithstanding the
possibility that other persons might make a different determination. If the
Fair Market Value to be used was thus fixed more than sixteen months prior to
the day as of which Fair Market Value is being determined, it will in any
event be no less than the book value of the stock being valued at the end of
the most recent period for which financial statements of the Company are
available.
6.1.2 Immediate Family. An individual's "Immediate Family" includes
only his or her spouse, parents or other ancestors, and children and other
direct descendants of that individual or of his or her spouse (including such
ancestors and descendants by adoption).
7 Miscellaneous.
7.1 Confidentiality. Wheaton hereby acknowledges and agrees that this
Agreement is confidential, and that its terms and contents shall not be
disclosed to any person other than through a press release of the Company.
7.2 Payment of Expenses. Except as expressly otherwise provided, each of
the Parties hereto shall pay all expenses and disbursements incurred by its
officers, employees, attorneys, accountants, financial advisers and other
agents and representatives in connection with this Agreement and the
performance of its obligations hereunder.
7.3 Notices. Any notices required or permitted to be given to, or served
upon, either Party hereto pursuant to this Agreement shall be sufficiently
given or served if sent to such Party by registered or certified mail,
addressed to it at its address, as set forth below, or to such other address
as it shall designate by written notice to the other parties addressed as
follows:
VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
Att: William E. Wheaton III, President and CEO
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William E. Wheaton III
C/o VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
7.4 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
7.5 Entire Agreement. This agreement constitutes the entire agreement
between the Parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the Parties hereto with respect to
the subject matter hereof.
7.6 Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the Party against
whom enforcement of any such modification or agreement is sought. Either Party
hereto may, by an instrument in writing, waive compliance by the other Party
with any term or provision of this Agreement to be performed or complied with
by such other Party hereto. The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any
subsequent breach.
7.7 Assignment. This Agreement is personal in nature and neither of the
Parties shall, without the written consent of the other, assign or transfer
its rights or obligations hereunder to another person or entity, except as
herein expressly provided or permitted and except that the Company may
transfer all or any portion of its rights or obligations hereunder to any of
its affiliates without such prior written consent. Subject to the foregoing
provisions of this Section 8.7, this Agreement shall be binding upon and inure
to the benefit of the Parties hereto and their respective successors and
assigns.
7.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York and all disputes arising hereunder shall
be adjudicated solely before the courts of New York to whose jurisdiction the
Parties hereto consent.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement and
caused the same to be delivered on their behalf as of the date first above
written.
VCS Technologies, Inc.
/s/ William Wheaton III By: /s/ William Wheaton III
------------------------ ------------------------
William E. Wheaton III William E. Wheaton III
President and CEO
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Employment Agreement, effective as of September 1, 1998 (the
"Effective Date"), between VCS Technologies, Inc., a Delaware corporation with
principal offices at 465 Glenbrook Road, Stamford, CT 06906 ("VCS") and
William E. Wheaton, III, residing at 10 Rainbow Drive, Riverside, CT 06878
("Wheaton").
WHEREAS, VCS is a company engaged in the sales and service of
videoconferencing and video streaming technologies;
WHEREAS, Wheaton is the founder and currently serves as the
President and Chief Executive Officer of VCS; and
WHEREAS, VCS and Wheaton believe that it is appropriate for them to
memorialize their understandings with respect to Wheaton's employment,
including confidentiality and non-competition provisions, and agree as to each
other's obligations pursuant to their employer-employee relationship.
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, VCS and Wheaton do hereby agree as follows:
1. Employment. VCS hereby employs Wheaton and Wheaton accepts this
employment and agrees to render services to VCS on the terms and conditions
set forth in this Agreement. Wheaton shall serve in the capacity of President
and Chief Executive Officer, perform services for VCS normally associated with
such positions, and use his best efforts to meet the business requirements and
goals set by the board of directors of VCS (the "Board"). In furtherance
thereof, Wheaton will devote his best efforts, including his full-time
attention, during reasonable business hours, to the affairs and business of
VCS. Wheaton further agrees to observe and comply with the rules and
regulations of VCS as adopted by the Board with respect to performance of his
duties, and to carry out and perform orders, directions, and policies enacted
by the Board.
2. Term. The term of this Employment Agreement shall be the period
from the Effective Date and terminating on December 31, 2001 (the "Initial
Employment Term"). The Agreement shall thereafter automatically renew for
successive one year terms, until terminated by either party in accordance with
this Agreement (the "Succeeding Employment Term") unless either party provides
written notice of termination to the other party at least 90 days prior to the
expiration of the Initial Employment Term or any Succeeding Employment Term.
In the event VCS terminates this Agreement by providing the aforementioned
notice, VCS will pay Wheaton the "Deferred Compensation" (as defined below).
3. Compensation.
3.1. Base Salary. VCS will compensate and pay Wheaton for
his services during the term of this Agreement at a base salary of $150,000
per year, and VCS agrees that the Base Salary will increase annually in an
amount no less than five per cent (5%) of the previous year's Base Salary (the
"Base Salary"). The Base Salary shall be paid to Wheaton in a manner
consistent with salary paid to the other employees of VCS.
3.2. Bonus. Wheaton may receive, from time to time, bonus
compensation from VCS, as established by the Board following the negotiation
of the terms by the parties (the "Bonus Compensation"). If at any time
hereafter VCS shall adopt a bonus program, an option program or any other form
of equity participation for senior executives of VCS, Wheaton shall be
eligible to participate in such program in a manner and capacity commensurate
with his position and duties.
3.3. Deferred Compensation.
3.3.1. Amount. Deferred Compensation shall be the
amount which is calculated as the greater of (A) 150% of the Base Salary
payments Wheaton would have received had his employment continued for the
remaining term of this Agreement (including yearly increases); or (B) an
amount equal to 200% of the highest annual compensation earned by Wheaton in
the past two years (including both Base Salary and Bonus Compensation). In
addition to the Deferred Compensation, Wheaton shall be entitled to all of the
benefits and personal perquisites otherwise provided in this
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Agreement (including car allowance) during that period of time which is the
greater of (X) the remaining term of this Agreement, or (Y) a one year
following the date of termination. The Deferred Compensation herein shall be
deemed liquidated damages resulting from VCS's termination of this Agreement
and shall be Wheaton's sole and exclusive remedy for any such termination.
Deferred Compensation shall not be diminished or offset by reason of any
earnings by Wheaton subsequent to the date of termination.
3.3.2. Payment of Deferred Compensation. Except as
otherwise provided below, the Deferred Compensation shall be paid in monthly
installments over the 12 months following the event giving rise to a Deferred
Compensation. If such termination is a result of the death of Wheaton, the
initial Deferred Compensation shall be made within 15 days after the personal
representative of Wheaton's estate notifies VCS that Letters Testamentary have
been issued to the estate appointing an authorized representative of the
estate.
3.4. Withholding. All compensation paid to Wheaton shall be
subject to the customary withholding tax and other employment taxes as
required with respect to compensation paid by an employer to an employee.
4. Benefits.
4.1. Health Insurance; Vacation. VCS shall provide Wheaton
with health insurance coverage, personal time and other benefits during the
term of this Agreement as agreed upon by the Board, but in no event will such
benefits be less than those offered to other employees of VCS. Wheaton shall
be entitled to four weeks paid vacation during each year of this Agreement.
4.2. Car Allowance. VCS will pay to Wheaton a car allowance
of $700 per month.
4.3. Life Insurance. Provided VCS has a net worth (as
reflected on any quarterly or annual financial statements) in excess of $1
million, VCS shall provide, at its own expense, life insurance coverage on
Wheaton's life for $1 million. Wheaton shall have full discretion to name the
beneficiary of this insurance. VCS shall have the right at its own expense and
for its own benefit to purchase additional insurance on Wheaton's life for the
benefit of VCS and Wheaton shall cooperate by providing necessary information,
submitting to required medical examinations, and otherwise complying with the
insurance carrier's requirements.
5. Expenses. VCS shall reimburse Wheaton or otherwise provide for or
pay for all reasonable expenses incurred by Wheaton in furtherance of or in
connection with the business of VCS, including, but not by way of limitation,
(i) all reasonable expenses incurred by Wheaton in accordance with VCS's
travel policy, as established by the Board; and (ii) all reasonable expenses
in connection with Wheaton's attendance at trade and professional conferences,
which are in furtherance of the business of VCS. Wheaton agrees that he will
furnish VCS with adequate records and other documents for the substantiation
of each such business expense.
6. Employment Termination
6.1. Resignation of Wheaton. The parties agree that Wheaton
has the right to voluntarily terminate his employment with VCS by providing
VCS with a minimum of 60 days' notice. Upon the termination date specified in
the notice, Wheaton will cease to have any of the powers associated with the
offices he held with VCS. In such event, all of VCS's obligations under this
Agreement will terminate immediately upon the date of such termination of
employment, and VCS will not be required to pay the Deferred Compensation.
6.2. Termination by VCS for Convenience. The parties agree
that the Board has the right to terminate Wheaton's employment for convenience
during the term of this Agreement upon notice to Wheaton. In such event, VCS
will pay Wheaton the Deferred Compensation. The date of termination will be
the date specified in a notice from the Board, and Wheaton will cease to have
any power of his office as of such date.
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6.3. Termination by VCS for Cause. The parties agree that
the Board has the right to terminate Wheaton's employment during the term of
this Agreement for "Cause." For the purposes of this Agreement, the term
"Cause" will mean:
o Conduct on Wheaton's part intended to or likely to injure VCS's
business or reputation;
o Actions by Wheaton in intentionally furnishing materially
false, misleading, or omissive information to the Board;
o Wheaton is convicted of any felony or other serious offense;
o Abusive use of drugs or alcohol by Wheaton;
o Any fraud, embezzlement or misappropriation by Wheaton of the
"assets" of VCS. For the purposes of this provision, the
parties acknowledge that "asset" includes, but is not limited
to the "Confidential Information" (as defined in Section 7 of
this Agreement); or
o Significant failure by Wheaton to perform duties and
obligations as set forth in their Agreement, resulting in
substantial damage to VCS, but not encompassing illness,
physical or mental incapacity.
In the event that Wheaton's employment is terminated by VCS for Cause, the
date of employment termination will be as specified in a notice to Wheaton
from VCS, and Wheaton will cease to have any power of his office as of such
date., VCS will pay Wheaton the Base Salary and any Bonus Compensation due him
as of such date, and all benefits provided by VCS to Wheaton will cease as of
such date except as otherwise required by law.
6.4. Termination by VCS for Death or Disability. The parties
agree that Wheaton's employment will terminate upon Wheaton's death or
Disability. The term "Disability" shall be defined as Wheaton's inability,
through physical or mental illness or other cause, to perform the majority of
his usual duties for a period of at least three continuous months. If
Wheaton's employment is terminated due to Wheaton's death or Disability, VCS
will pay the Deferred Compensation.
6.5. Good Reason. Wheaton may terminate his employment for
Good Reason ("Good Reason") upon 60 days' notice to VCS if (i) Wheaton's
duties are materially diminished or altered so as to be inconsistent Wheaton's
position, authority or responsibilities as the President and Chief Executive
Officer of VCS; (ii) Wheaton's title any other substantial adverse change in
Wheaton's position including titles, authority or responsibilities; (iii) the
material failure by VCS to comply with the terms of this Agreement; (iv) VCS
requires Wheaton to be based or perform services at any location more than 50
miles from Stamford, CT (except normal travel requirements associated with
Wheaton's position and titles); or (v) Wheaton's Base Salary is materially
diminished. In the event Wheaton's employment relationship with VCS is
terminated for "Good Reason," VCS will pay Wheaton the Deferred Compensation.
In the event that Wheaton shall in good faith give a "Notice of Termination,"
as hereinafter defined in Section 6.7 hereof, for Good Reason and it shall
thereafter be determined that Good Reason did not exist, the employment of
Wheaton shall, unless VCS and Wheaton shall otherwise mutually agree, be
deemed to have terminated, at the date of the giving of such purported Notice
of Termination. In such event Wheaton shall be deemed to have elected to
voluntarily resign and shall be entitled to receive only those payments and
benefits which he would have been entitled to receive at such date under
Section 6.1 of this Agreement.
6.6. Change of Control. Wheaton may terminate this Agreement
upon 30 days' notice to VCS at any time within the 180 day period following
the date of the occurrence of a "Change of Control." For the purposes of this
Agreement, a "Change of Control" shall be deemed to have occurred if: VCS has
a net worth of at least $1 million (as reflected on any quarterly or annual
financial statement), and either (i) a third person, including an entity or a
"group" as defined in Article 13(d) or 14(d) of the Securities Exchange Act of
1934, as amended (other than an entity or "group" which includes Wheaton),
becomes the beneficial owner of shares of VCS having 30% or more of the total
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number of votes that may be cast for the election of directors of VCS in the
year 2000 and thereafter; or (ii) as the result of, or in connection with, any
cash tender or exchange offer, merger of other business combination, sale of
assets or contested election, or any combination of the foregoing transactions
(a "Transaction"), the persons who were directors of VCS before the
Transaction shall cease to constitute a majority of the Board of VCS or any
successor to VCS. In the event Wheaton's employment relationship with VCS is
terminated for a change of control, VCS will pay Wheaton the Deferred
Compensation.
6.7. Notice of Termination. Any termination by VCS for
Cause, or by Wheaton for Good Reason shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section
18hereof. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Wheaton's
employment under the provision so indicated and (iii) if the termination date
is other than the date of receipt of such notice, specifies the termination
date of this Agreement which date shall be in accordance with the specific
termination provision of this Agreement relied upon.
6.8. Survival of Agreement Upon Termination. In the event
that Wheaton's employment is terminated pursuant to any provision set forth in
this Section 6, the rights and obligations of the parties which are set forth
in Sections 7 through 17 of this Agreement shall survive the employment
termination for a period from the date of such employment termination through
the third anniversary of such date.
7. Confidential Information. Wheaton hereby agrees and acknowledges
that the following information and materials, whether in written, oral,
magnetic, photographic, optical or other form and whether now existing or
developed or created during the period of Wheaton's employment or engagement
with VCS, excepting information obtained by Wheaton from general or public
sources, are proprietary to VCS and are highly confidential in nature (the
"Confidential Information"):
7.1. Business Records, Marketing Plans and Customer
Information. All books, records, documents, memoranda and materials, and the
information contained therein directly relating to the business and finances
of VCS including, but not limited to: (i) marketing and development plans,
forecasts, forecast assumptions, forecast volumes, future plans and potential
strategies of VCS; (ii) cost objectives, pricing policies and procedures,
quoting policies and procedures, and unpublished price lists; (iii) licensing
policies, strategies and techniques; (iv) customer lists, names of past,
present and prospective customers and their representatives; (v) data and
other business information about or provided by past, present and prospective
customers; (vi) names of past, present and prospective vendors and their
representatives, data and other Information about or provided by past, present
and prospective vendors; (vii) purchasing information, orders, invoices,
billings, and payment of billings; (viii) past, present and prospective
licenses and licensees, the terms and conditions of any licenses or
prospective licenses, contracts or prospective contracts; (ix) types of
products, supplies, materials and services purchased, leased, licensed and/or
sold by VCS; (x) past, present and future research and development
arrangements; (xi) customer service information; (xii) joint ventures, mergers
and/or acquisitions; (xiii) VCS personnel policies and procedures, VCS
personnel files, and the compensation of officers, directors and employees of
VCS; and (xiv) all other confidential business records and trade secrets of
VCS.
7.2. Technology and Manufacturing Procedures. All books,
records, documents, memoranda and materials, and the information contained
therein, relating to the technology of VCS (whether or not patentable, whether
or not protected by copyright, whether developed by or for VCS) including, but
not limited to: (i) ideas and concepts for existing and new products,
processes and services; (ii) specifications for products, equipment and
processes, whether technical or financial; (iii) manufacturing and performance
specifications and procedures; (iv) engineering drawings, flow charts, and
graphs; (v) technical, research and engineering data; (vi) formulations,
materials, and material specifications; (vii) laboratory studies and benchmark
tests; (viii) laboratory notebooks; (ix) plant layout
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and equipment; (x) manuals, including service manuals and operation manuals;
(xi) quality assurance policies, procedures and specifications; (xii)
validation studies; and (xiii) all other know-how, methodology, procedures,
techniques and trade secrets related to the research, engineering and
development affairs of VCS.
7.3. Third Party Information. Any and all other information
and materials in VCS's possession or under its control from any other person
or entity which VCS is obligated to treat as confidential or proprietary
("Third Party Information").
7.4. Not Generally Known. Any and all Confidential
Information not generally known to the public or within the industries or
trades in which VCS competes.
8. General Skills and Knowledge. The general skills and experience
gained by Wheaton during Wheaton's employment with VCS, and information
publicly available or generally known within the industries or trades in which
VCS competes, is not considered Confidential Information.
9. Wheaton's Obligations as to Confidential Information and
Materials. During Wheaton's employment by VCS, Wheaton will have access to the
Confidential Information and will occupy a position of trust and confidence
with respect to VCS's affairs and business. Wheaton agrees to take the
following steps to preserve the confidential and proprietary nature of the
Confidential Information:
9.1. Non-Disclosure. During and for a period of three years
after Wheaton's employment with VCS, Wheaton will not use, disclose or
otherwise permit any person or entity access to any of the Confidential
Information other than as required in the performance of Wheaton's duties with
VCS.
9.2. Prevent Disclosure. Wheaton will take all reasonable
precautions to prevent disclosure of the Confidential Information in
accordance with VCS's reasonable instructions to Wheaton.
9.3. Return all Materials. Upon termination of Wheaton's
employment with VCS, for any reason whatsoever, Wheaton will deliver to VCS
all tangible materials embodying the Confidential Information, including,
without limitation, any documentation, records, listings, notes, data,
sketches, drawings, memoranda, models, accounts, reference materials, samples,
machine-readable media and equipment which in any way relate to the
Confidential Information.
10. Ideas and Inventions. Wheaton agrees that all right, title and
interest in or to any and all Inventions are the property of VCS. For the
purposes of this Agreement, "Inventions" shall mean all ideas, concepts,
know-how, techniques, processes, methods, inventions, discoveries,
developments, innovations and improvements (i) conceived or made by Wheaton,
whether alone or with others, in the course of Wheaton's employment by VCS, or
(ii) conceived or made by Wheaton, whether alone or with others, in the course
of Wheaton's employment, but which reach fruition within the period from the
date of termination of Wheaton's employment through the second anniversary of
such date, and which either (a) involve or are reasonably related to the
business of VCS or to VCS's actual or demonstrably anticipated research or
development; or (b) incorporate or are derived from, in whole or in part, any
of the Confidential Information. Wheaton agrees to promptly disclose all
Inventions to VCS, and to provide all assistance reasonably requested by VCS
in the preservation of its interests in the Inventions, such as by executing
documents, testifying, etc. Wheaton agrees to execute, acknowledge and deliver
any instruments confirming the complete ownership by VCS of such Inventions.
Such assistance shall be provided at VCS's expense without any additional
compensation to Wheaton.
11. Post-Employment Procedures. Wheaton agrees that, upon the
termination of his employment with VCS, he will (i) participate in good faith
in VCS's exit interview process; and (ii) enter into an appropriate Employment
Termination Agreement, in which, among other things, Wheaton will represent to
VCS that he has fully complied with the terms of this Agreement and that he
will fulfill the then-executory obligations contained in this Agreement.
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12. Copyrights. Wheaton agrees that any work prepared for VCS which
is protected under United States Copyright laws or under the universal
Copyright Convention, the Berne Copyright convention and/or the Buenos Aires
Copyright Convention shall be a work made for hire and ownership of all
copyrights (including all renewals and extensions) therein shall vest in VCS.
In the event any such work is deemed not to be a work made for hire for any
reason, Wheaton hereby grants, transfers and assigns all right, title and
interest in such work and all copyrights in such work and all renewals and
extensions thereof to VCS, and agrees to provide all assistance reasonably
requested by VCS in the establishment, preservation and enforcement of its
copyright in such work, such assistance to be provided at VCS's expense but
without any additional compensation to Wheaton. Wheaton hereby agrees to and
does hereby waive all moral rights with respect to the work developed or
produced hereunder, including, without limitation any and all rights of
identification of authorship and any and all rights of approval, restriction,
or limitation on use or subsequent modifications.
13. Conflicting Obligations and Rights. Before (i) performing any
obligations Wheaton may have to preserve the confidentiality of another's
proprietary information or materials, or (ii) exercising any rights Wheaton
may claim to any patent or copyrights trade secrets, or other discoveries,
inventions, ideas, know-how, techniques methods, processes or other
proprietary information or materials before performing that work, Wheaton
shall inform VCS in writing of any apparent conflict between Wheaton's work
for VCS and such other obligations and/or rights. In the absence of such
written notice, VCS may conclude that no such conflict exists and Wheaton
agrees thereafter to make no such claim against VCS. VCS shall hold such
disclosures by Wheaton in strict confidence.
14. Restrictive Covenants.
14.1. Acknowledgments. Wheaton acknowledges that (i) VCS's
business is all aspects of videoconferencing and video streaming including,
but not limited to, equipment and software sales and systems integration,
integrating voice/video/data systems through intranet and Internet technology;
and providing consulting services relating thereto, and that (ii) fulfillment
of the obligations hereunder will result in Wheaton becoming familiar with the
business affairs of VCS and any present or future parent, subsidiary and/or
affiliate.
14.2. Covenant Not to Compete. In consideration for the
Compensation, and as a condition to the performance by VCS of all obligations
under this Agreement, Wheaton agrees that during the Initial Employment Term
or any Succeeding Employment Terms of this Agreement and for the period from
the date of termination of Wheaton's employment pursuant to either Section 6.1
or 6.3 hereof through the second anniversary of such date, Wheaton shall not
directly or indirectly through any other person, firm or corporation compete
with or be engaged in the same business or "participate in" any other business
or organization which during such period competes with or is engaged in the
same business as VCS. The term "participate in" shall mean: "directly or
indirectly, for his own benefit or for, with, or through any other person,
firm, or corporation, own, manage, operate, control, loan money to, or
participate in the ownership, management, operation, or control of, or be
connected as a director, officer, employee, partner, consultant, agent,
independent contractor, or otherwise with, or acquiesce in the use of his
name." Notwithstanding the foregoing, it shall not be a breach of the
provisions of this Section 14 if, after the Term of this Agreement, Wheaton is
a passive investor in any publicly held entity and Wheaton owns three per cent
(3%) or less of the equity interests therein.
14.3. Restrictive Covenants Necessary and Reasonable.
Wheaton agrees that the provisions of this Section 14 are necessary and
reasonable to protect VCS in the conduct of its business. If any restriction
contained in this Section 14 shall be deemed to be invalid, illegal, or
unenforceable by reason of the extent, duration or geographical scope thereof,
or otherwise, then the court making such determination shall have the right to
reduce such extent, duration, geographical scope, or other provisions hereof
and in its reduced form such restriction shall then be enforceable in the
manner contemplated hereby.
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15. Injunctive Relief. Wheaton, recognizing that irreparable injury
shall result to VCS in the event of Wheaton's breach of the terms and
conditions of this Agreement, agrees that in the event of his breach or
threatened breach, VCS shall be entitled to injunctive relief restraining
Wheaton, and any and all persons or entities acting for or with him, from such
breach or threatened breach. Nothing herein contained, however, shall be
construed as prohibiting VCS from pursuing any other remedies available to it
by reason of such breach or threatened breach.
16. Indemnification.
16.1. To the full extent allowed by law, VCS shall hold
harmless and indemnify Wheaton, his executors, administrators or assigns,
against any and all judgments, penalties (including excise and similar taxes),
fines, settlements and reasonable expenses (including attorneys' fees)
actually incurred by Wheaton (net of any related insurance proceeds or other
amounts received by Wheaton or paid by or on behalf of VCS on Wheaton's behalf
in compensation of such judgments, penalties, fines, settlements or expenses)
in connection with any threatened, actual or completed action, suit or
proceeding, whether civil, criminal, arbitral, administrative or
investigative, or any appeal in such action, suit or proceeding, to which
Wheaton was, is or is threatened to be made a named defendant or respondent (a
"Proceeding"), because Wheaton is or was a director or officer of VCS, or was
serving at the request of VCS as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary (an "Affiliate
Executive") of another corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise (each, a
"Company Affiliate"). Upon authorization of indemnification of Wheaton by the
Board in accordance with the applicable provisions of the Delaware General
Corporation Law (the "DGCL"), Wheaton shall be presumed to be entitled to such
indemnification under this Agreement upon submission of a Claim (as
hereinafter defined). Thereafter, VCS shall have the burden of proof to
overcome the presumption that Wheaton is so entitled. Such presumption shall
only be overcome by a judgment or other final adjudication, after all appeals
and all time for appeals have expired ("Final Determination"), adverse to
Wheaton establishing that such indemnification is not permitted hereunder or
by law. An actual determination by VCS (including its Board, legal counsel, or
its stockholders) that Wheaton has not met the applicable standard of conduct
for indemnification shall not be a defense to the action or create a
presumption that Wheaton has not met the applicable standard of conduct. The
purchase, establishment or maintenance of any Indemnification Arrangement
shall not in any way diminish, restrict, limit or affect the rights and
obligations of VCS or of Wheaton under this Agreement except as expressly
provided herein, and the execution and delivery of this Agreement by VCS and
Wheaton shall not in any way diminish, restrict, limit or affect Wheaton's
right to indemnification from VCS or any other party or parties under any
other indemnification arrangement, the Certificate of Incorporation or Bylaws
of VCS, or the DGCL.
16.2. Subject only to the provisions of this Section 16.2,
as long as Wheaton shall continue to serve as a director and/or officer of VCS
(or shall continue at the request of VCS to serve as an Affiliate Executive)
and, thereafter, as long as Wheaton shall be subject to any possible
Proceeding by reason of the fact that Wheaton was or is a director and/or
officer of VCS (or served in any of said other capacities), VCS shall, unless
no such policies are available in any market, purchase and maintain in effect
for the benefit of Wheaton one or more valid, binding and enforceable policies
(the "Insurance Policies") of directors' and officers' liability insurance
("D&O Insurance") providing adequate liability coverage for Wheaton's acts as
a director and/or officer of VCS or as an Affiliate Executive. VCS may
promptly notify Wheaton of any lapse, amendment or failure to renew said
policy or policies or any provision thereof relating to the extent or nature
of coverage provided thereunder. In the event VCS does not purchase and
maintain in effect said policy or policies of D&O Insurance pursuant to the
provisions of this Section 16.2, VCS shall, to the full extent permitted by
law, in addition to and not in limitation of the other rights granted Wheaton
under this Agreement, hold harmless and indemnify Wheaton to the full extent
of coverage which would otherwise have been provided for the benefit of
Wheaton pursuant to the Insurance Policies.
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16.3. Wheaton shall have the right to receive from VCS on
demand, or at his option to have VCS pay promptly on his behalf, in advance of
a Final Determination of a Proceeding all expenses payable by VCS pursuant to
the terms of this Agreement as corresponding amounts are expended or incurred
by Wheaton in connection with such Proceeding or otherwise expended or
incurred by Wheaton (such amounts so expended or incurred being referred to as
"Advanced Amounts"). In making any claim for payment by VCS of any expenses,
including any Advanced Amount, pursuant to this Agreement, Wheaton shall
submit to VCS a written request for payment (a "Claim"), which includes a
schedule setting forth in reasonable detail the dollar amount expended (or
incurred or expected to be expended or incurred). Each item on such schedule
shall be supported by the bill, agreement or other documentation relating
thereto, a copy of which shall be appended to the schedule as an exhibit.
Where Wheaton is requesting Advanced Amounts, Wheaton must also provide (i)
written affirmation of such Wheaton's good faith belief that he has met the
standard of conduct required by law for indemnification, and (ii) a written
undertaking to repay such Advanced Amounts if a Final Determination is made
that Wheaton is not entitled to indemnification hereunder.
16.4. VCS shall not be liable under this Agreement to make
any payment in connection with any claim made against Wheaton for an
accounting of profits made from the purchase or sale by Wheaton of securities
of VCS within the meaning of Section 16(b) of the Exchange Act or similar
provisions of any state statutory law or common law.
16.5. All agreements and obligations of VCS contained herein
shall continue during the period Wheaton is a director and/or officer of VCS
(or is serving at the request of VCS as an Affiliate Executive) and shall
continue thereafter so long as Wheaton shall be subject to any possible
Proceeding by reason of the fact that Wheaton was a director or officer of VCS
or was serving as such an Affiliate Executive.
16.6. Promptly after receipt by Wheaton of notice of the
commencement of any Proceeding, Wheaton shall, if a claim in respect thereof
is to be made against VCS under this Agreement, notify VCS of the commencement
thereof, but failure to so notify VCS will not relieve VCS from any liability
which it may have to Wheaton. With respect to any such Proceeding: (i) VCS
shall be entitled to participate therein at its own expense; (ii) except with
prior written consent of Wheaton, VCS shall not be entitled to assume the
defense of any Proceeding; and (iii) VCS shall not settle any Proceeding in
any manner which would impose any penalty or limitation on Wheaton without
Wheaton's prior written consent.
17. Dispute Resolution. VCS and Wheaton agree that any dispute or
controversy arising between any of the parties to this Agreement, or any
person or entity in privity therewith, out of the transactions effected and
relationships created in connection herewith, including any dispute or
controversy involving the formation, terms or construction of this Agreement,
regardless of kind or character, will be resolved through binding arbitration
held in Stamford, CT. The only disputes not subject to mandatory, binding
arbitration are requests for injunctive relief. With respect to the
arbitration of any dispute or controversy, each party understands that: (i)
arbitration is final and binding on the parties; (ii) each party is waiving
its right to seek certain remedies in court, including to right to a jury
trial; (iii) discovery in arbitration is different and more limited than
discovery in litigation; and (iv) an arbitrators' award need not include
factual findings or legal reasoning, and any party's right to appeal or to
seek modification of a ruling by the arbitrator is strictly limited.
17.1. Each party to this Agreement will submit any dispute
or controversy to arbitration before the American Arbitration Association
("AAA") within five days after receiving a written request to do so from the
other party. If any party fails to submit a dispute or controversy to
arbitration as requested, then the requesting party may commence the
arbitration proceeding. The Federal Arbitration Act will govern the proceeding
and all issues raised by this Agreement to be arbitrated.
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Each party to this Agreement will be bound by the determination of an
arbitration panel of three members empaneled by the AAA to adjudicate the
dispute. Judgment on any arbitration award may be entered in any court of
competent jurisdiction.
17.2. Any party to this Agreement may bring an action
including a summary or expedited proceeding of any such dispute or controversy
in a court of competent jurisdiction and, further, may seek provision or
ancillary remedies, including temporary or injunctive relief in connection
with such dispute or controversy in a court of competent jurisdiction,
provided that the dispute or controversy is ultimately resolved through
binding arbitration conducted in accordance with the terms and conditions of
Section 17. If any party institutes legal proceedings in an effort to resist
arbitration and is unsuccessful in doing so, the prevailing party is entitled
to recover, from the losing party, its legal fees and out-of-pocket expenses
incurred in connection with the defense of such legal proceedings.
18. Miscellaneous.
18.1. Notices. Any and all notices, demands, requests or
other communication required or permitted by this Agreement or by law to be
served on, given to, or delivered to any party hereto by any other party to
this Agreement shall be in writing and shall be deemed duly served, given, or
delivered when personally delivered to the party to be notified, or in lieu of
such personal delivery, when deposited in the United States mail, registered
or certified mail, return receipt requested, or when confirmed as received if
delivered by overnight courier, addressed to the to the party to be notified,
at the address of VCS at its principal office, as first set forth above, or to
Wheaton at the address as first set forth above. VCS or Wheaton may change the
address in the manner required by law for purposes of this paragraph by giving
notice of the change, in the manner required by this paragraph, to the
respective parties.
18.2. Amendment. This Agreement may not be modified,
changed, amended, or altered except in writing signed by Wheaton or his duly
authorized representative, and by a member of the Board.
18.3. Governing Law. This Agreement shall be interpreted in
accordance with the laws of the State of Connecticut. It shall inure to the
benefit of and be binding upon VCS, and its successors and assigns.
18.4. Attorney's Fees. Should any litigation or arbitration
be commenced between the parties to this Agreement concerning any provision of
this Agreement, the expense of all attorneys' fees and other costs incurred in
connection therewith shall be paid by the losing party.
18.5. Severability. Should any provision or portion of this
Agreement be held unenforceable or invalid for any reason, the remaining
provisions and portions of this Agreement shall be unaffected by such holding.
18.6. Entire Agreement. This Agreement constitutes the sole
and only agreement of the parties hereto respecting the subject matter hereof.
Any prior agreements, promises, negotiations, or representations concerning
its subject matter not expressly set forth in this Agreement, are of no force
and effect.
18.7. Counterparts. This Agreement and any certificates made
pursuant hereto, may be executed in any number of counterparts and when so
executed all of such counterparts shall constitute a single instrument binding
upon all parties hereto notwithstanding the fact that all parties are not
signatory to the original or to the same counterpart.
18.8. Section Headings. The Article and Section headings
used in this Agreement are for reference purposes only, and should not be used
in construing this Agreement.
9
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IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year as set forth below.
VCS TECHNOLOGIES, INC.
By: /s/ David Russell, Jr. /s/ William Wheaton, III
----------------------------- --------------------------
David Russell, Jr. William Wheaton, III
Chief Financial Officer
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Consultant Confidentiality and Inventions Agreement
1 Purpose of Agreement. As a condition and in consideration of relationship by
VC Solutions, Inc. (the "Company") I, the Consultant named at the end of this
Consultant Confidentiality and Inventions Agreement (the "Agreement"),
acknowledge that confidential information and inventions of Company are trade
secrets and important assets of Company, and I agree to be bound by the terms
of this Agreement.
2 Confidentiality. The following information and materials (collectively
referred to as "Confidential Information"), whether in written, oral,
magnetic, photographic, optical or other form and whether now existing or
developed or created during the period of my relationship or engagement with
Company, excepting information obtained by me from general or public sources,
are proprietary to Company and are highly confidential in nature.
2.1 Business Records, Marketing Plans and Customer Information. All
books, records, documents, memoranda and materials, and the information
contained therein, relating to the business and finances of Company including,
but not limited to: (i) marketing and development plans, forecasts, forecast
assumptions, forecast volumes, future plans and potential strategies of
Company; (ii) cost objectives, pricing policies and procedures, quoting
policies and procedures, and unpublished price lists; (iii) licensing
policies, strategies and techniques; (iv) customer lists, names of past,
present and prospective customers and their representatives; (v) data and
other information about or provided by past, present and prospective vendors;
(vii) purchasing information, orders, invoices, billings, and payment of
billings; (viii) past, present and prospective licenses and licensees, the
terms and conditions of any licenses or prospective licenses, contracts or
prospective contracts; (ix) types of products, supplies, materials and
services purchased, leased, licensed and/or sold by Company; (x) past, present
and future research and development arrangements; (xi) customer service
information; (xii) joint ventures, mergers and/or acquisitions; (xiii) Company
personnel policies and procedures, Company personnel files, and the
compensation of officers, directors and Consultants of Company; and (xiv) all
other confidential business records and trade secrets of Company.
2.2 Technology and Manufacturing Procedures. All books, records,
documents, memoranda and materials, and the information contained therein,
relating to the technology of Company (whether or not patentable, whether or
not protected by copyright, whether developed by or for Company) including,
but not limited to: (i) technology licensed to Company by any third party;
(ii) ideas and concepts for existing and new products, processes and services;
(iii) specifications for products, equipment and processes, whether technical
or financial; (iv) manufacturing and performance specifications and
procedures; (v) engineering drawings, flow charts, and graphs; (vi) technical,
research and engineering data; (vii) formulations, materials, and material
specifications; (viii) laboratory studies and benchmark tests; (ix) laboratory
notebooks (or equivalent); (x) plant layout and equipment; (xi) manuals,
including service manuals and operation manuals; (xii) quality assurance
policies, procedures and specifications; (xiii) feasibility and trade secrets
related to the research, engineering, development and manufacturing of
Company.
2.3 Third Party Information, and Not Generally Known. Any and all
other information and materials in Company's possession or under its control
from any other person or entity which Company is obligated to treat as
confidential or proprietary ("Third Party Information"), and any and all other
information not generally known to the public or within the industries or
trades in which Company competes.
2.4 General Skills and Knowledge. The general skills and experience
gained by Consultant during Consultant's relationship with Company, and
information publicly available or generally known within the industries or
trades in which Company competes, is not considered Confidential Information.
3 Consultant's Obligations as to Confidential Information and Materials.
During Consultant's relationship by Company, Consultant may have access to all
or a portion of the Confidential
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Information and, as such, will occupy a position of trust and confidence with
respect to Company's affairs and business. Consultant will take the following
steps to preserve the confidential and proprietary nature of the Confidential
Information:
3.1 Non-Disclosure. During and for a period of three years after
Consultant's relationship with Company, Consultant will not use, disclose or
otherwise permit any person or entity access to any of the Confidential
Information other than as required in the performance of Consultant's duties
with Company. In addition, Consultant will take all reasonable precautions to
prevent disclosure of the Confidential Information..
3.2 Return All Materials. Upon termination of Consultant's
relationship with Company, for any reason whatsoever, Consultant will deliver
to Company all tangible materials embodying the Confidential Information,
including, without limitation, any documentation, records, listings, notes,
data, sketches, drawings, memoranda, models, accounts, reference materials,
samples, machine-readable media and equipment which in any way relate to the
Confidential Information. Consultant may not retain any copies or abstracts of
any Confidential Information.
4 Ideas and Inventions. For the purpose of this Agreement, "Inventions" shall
mean all ideas, concepts, know-how, techniques, processes, methods,
inventions, discoveries, developments, innovations and improvements (i)
conceived or made by Consultant, whether alone or with others, in the course
of Consultant's relationship by Company; or (ii) conceived or made by
Consultant, whether alone or with others, in the course of Consultant's
relationship, but which reach fruition within two years of the termination of
Consultant's relationship, and which either (a) involve or are reasonably
related to either the business of Company or to Company's actual or
demonstrably anticipated research or development, or (b) incorporate or are
based on, in whole or in part, any of the Confidential Information; or (iii)
conceived or made by Consultant, whether alone or with others, within one year
of termination of Consultant's relationship and which either (a) involve or
are reasonably related to either the business of Company or to Company's
actual or demonstrably anticipated research or development, or (b) incorporate
or are based on, in whole or in part, any of the Confidential Information.
4.1 Inventions are Property of Company. Consultant agrees that all
right, title and interest in or to any and all Inventions are the sole and
exclusive property of Company. Consultant agrees to promptly disclose all
Inventions to Company, and to provide all assistance reasonably requested by
Company in the preservation of its interests in the Inventions, such as by
executing documents, testifying, etc. Consultant agrees to execute,
acknowledge and deliver any instruments confirming the complete ownership by
Company of such Inventions. Such assistance shall be provided at Company's
expense, but without any additional compensation to Consultant. Consultant
agrees that if Consultant makes an invention which Consultant believes to be
outside the scope of this Agreement, Consultant shall disclose the invention
to Company management, through Consultant's superior, and request a release of
any claim of interest therein by Company, which release if granted may be
subject to a royalty-free reserved license to Company.
5 Copyrights. Consultant agrees that any work prepared for Company which is
protected under United States copyright laws or under the Universal Copyright
Convention, the Berne Copyright Convention and/or the Buenos Aires Copyright
Convention shall be a work made for hire and ownership of all copyrights
(including all renewals and extensions therein) shall vest in Company. In the
event any such work is deemed not to be a work made for hire for any reason,
Consultant hereby grants, transfers and assigns all right, title and interest
in such work and all copyrights in such work and all renewals and extensions
thereof to Company, and agrees to provide all assistance reasonably requested
by Company in the establishment, preservation, and enforcement of its
copyright in such work, such assistance to be provided at Company's expense,
but without any additional compensation to Consultant. Consultant hereby
agrees to and does hereby waive all moral rights with respect to the work
developed or produced hereunder, including without limitation, any and all
rights of identification of authorship and any and all rights of approval,
restriction, or limitation on use or subsequent modifications.
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6 Consultant Rights. This Agreement shall neither embrace nor include any
ideas, inventions, improvements, innovations, applications for and/or Letters
Patent, and copyrights owned or controlled by Consultant prior to the time of
Consultant's relationship by Company, which are both identified below and
provable by appropriate evidence, complying with the requirements of the
United States patent law and the Rules of Practice of the United States Patent
and Trademark Office for proof of invention. Company shall hold such
disclosures by Consultant in strict confidence.
7 Conflicting Obligations and Rights. Before undertaking a particular
assignment or performing any related work, Consultant shall inform Company in
writing of any apparent conflict between Consultant's work for Company on such
particular assignment and other obligations and (i) any obligations Consultant
may have to preserve the confidentiality of another's proprietary information
or materials, or (ii) exercising any rights Consultant may claim to any ideas,
inventions, improvements, innovations, applications for and/or Letters Patent,
and copyrights identified in Paragraph 6. In the absence of such written
notice, Company may conclude that no such conflict exists and Consultant
agrees thereafter to make no such claim against Company.
8 Injunctive Relief. Consultant, recognizing that irreparable injury shall
result to Company in the event of Consultant's breach of the terms and
conditions of this Agreement, agrees that in the event of his breach or
threatened breach, Company shall be entitled to injunctive relief restraining
Consultant, and any and all persons or entities acting for or with Consultant,
from such breach or threatened breach. Nothing herein contained, however,
shall be construed as prohibiting Company from pursuing any other remedies
available to it by reason of such breach or threatened breach.
9 Miscellaneous. This Agreement may not be modified, changed, amended , or
altered except in writing signed by Consultant or his duly authorized
representative, and by an officer of Company. This Agreement shall be
interpreted in accordance with the laws of the State of California. Any claims
or action arising out of this Agreement shall be decided in Orange County,
California. At the option of either party, any dispute arising from or with
respect to this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with its commercial rules. Should any
legal action be commenced between the parties to this Agreement concerning any
provision of this Agreement, the expense of all attorneys' fees and other
costs incurred in connection therewith shall be paid by the losing party.
Should any provision or portion of this Agreement be held unenforceable or
invalid for any reason, the remaining provisions and portions of this
Agreement shall be unaffected by such holding. This Agreement constitutes the
sole and only agreement of the parties hereto concerning the subject matter
addressed in this Agreement. Any prior agreements, promises, negotiations, or
representations concerning its subject matter not expressly set forth in this
Agreement, are of no force and effect.
VC Solutions, Inc. Consultant
By William E. Wheaton, III
Signature /s/ William E. Wheaton Signature /s/ David Russell, Jr.
-------------------------- -----------------------
Print Name William E. Wheaton III Print Name David Russell
-------------------------- -----------------------
Title President Residence 200 E. 94 St.
-------------------------- -----------------------
Date 1/16/98 City New York
-------------------------- -----------------------
State N.Y. Zip 10128
-----------------------
Date 1/16/98
-----------------------
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PURSUANT TO PARAGRAPH 6, I HAVE MADE A RECORD BELOW OF THE IDEAS, INVENTIONS,
ETC. WITH BRIEF DESCRIPTIONS THEREOF, WHICH I POSSESS AT THE TIME OF
RELATIONSHIP AND WHICH I WISH TO EXCLUDE FROM THE SCOPE OF THIS AGREEMENT.
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Consultant Signature
- ---------------------------------
Date
4
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Warrant Issuance Agreement (the "Agreement") effective as of August
31, 1998 by and between VCS Technologies, Inc., a Delaware corporation (the
"Company"), and Cove Hill Consulting, Inc., a New York corporation ("Cove
Hill"). The Company and Cove Hill may be referred to herein collectively as
the "Parties" or individually as a "Party."
In consideration of the promises and the mutual covenants contained
herein, the Parties hereby agree as follows:
1 Acknowledgments. The Parties acknowledge that on January 15, 1998, in
consideration for consulting services rendered to the Company by Cove Hill,
the Company issued to Cove Hill warrants to purchase 130,000 shares of the
Company's common stock (the "Common Stock") exercisable at an exercise price
of $2.00 per share (the "Existing Warrants"). The Parties further acknowledge
that all references herein to the Common Stock are effective as of the date of
this Agreement. Upon the effective date (if any) of an anticipated reverse
stock split of the outstanding Common Stock to be effected following the date
of this Agreement, all references to the Common Stock contained herein shall
be deemed adjusted in accordance with such reverse stock split.
2 Issuance of New Warrants; Cancellation of Existing Warrants. In
consideration for additional consulting services rendered to the Company by
Cove Hill, and in consideration for the surrender by Cove Hill of the Existing
Warrants for cancellation, the Company hereby agrees to issue to Cove Hill
warrants to purchase an aggregate of 126,000 shares of Common Stock, such
warrants exercisable at an exercise price of $0.10 per share for a period of
five years following the date hereof (the "New Warrants"). The Company will
deliver to Cove Hill a certificate evidencing the New Warrants as soon as
practicable following the date of this Agreement. The Existing Warrants are
hereby canceled, null and void, and of no further effect.
3 Representations and Warranties of the Company. The Company represents and
warrants to Cove Hill as follows:
3.1 The Company is duly organized, validly existing and in good standing
under the laws of the state of Delaware with full power and authority to
operate its business as currently conducted.
3.2 The authorized capital stock of the Company consists of 9,990,000
shares of Common Stock and 10,000 shares of Preferred Stock. Each outstanding
share of Common Stock is duly authorized, validly issued, fully paid and
non-assessable, and has not been issued and is not owned or held in violation
of any preemptive rights of stockholders. No shares of Preferred Stock are
currently outstanding.
3.3 The Company has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. This Agreement has been duly
authorized by the Company and, when executed and delivered by the Company will
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
3.4 No consent, authorization, approval, order, license, certificate or
permit of or from, or declaration or filing with, any federal, state, local or
other governmental authority, or any court or any other tribunal, is required
by the Company for the execution, delivery or performance by the Company under
this Agreement (except for such filings as may be required under federal and
state securities laws).
4 Representations and Warranties of Cove Hill. Cove Hill hereby represents and
warrants to the Company as follows:
4.1 Cove Hill has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. This Agreement has been duly
authorized by Cove Hill and, when executed and delivered by Cove Hill will
constitute the legal, valid and binding obligation of Cove Hill, enforceable
against Cove Hill in accordance with its terms. No consent, authorization,
approval, order, license, certificate or permit of or from, or declaration or
filing with, any federal, state, local or other governmental authority, or any
court or any other tribunal, is required by Cove Hill for the execution,
<PAGE>
delivery or performance by Cove Hill under this Agreement.
4.2 Cove Hill has received, read carefully and is familiar with this
Agreement. Respecting the Company, Cove Hill is familiar with the Company's
business and financial condition and any other matters relating to the
transactions contemplated hereby; Cove Hill has received all materials which
have been requested by it, has had a reasonable opportunity to ask questions
of the Company and its representatives, and the Company has answered all
inquiries that Cove Hill has put to it. Cove Hill has taken all the steps
necessary to evaluate the merits and risks of the refinancing transactions
contemplated hereby.
4.3 Cove Hill has been advised by the Company to consider retaining legal
counsel in connection with the preparation and the execution of this
Agreement.
4.4 Cove Hill represents that it is an "accredited investor" as such term
is defined in Rule 501 of the Rules and Regulations promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
4.5 Cove Hill has such knowledge and experience in finance, securities,
investments and other business matters so as to be able to evaluate the merits
and risks of its investment in the Company.
4.6 Cove Hill has adequate means of providing for its current and
foreseeable future needs and has no need for liquidity of its investment in
the Company. Cove Hill recognizes and is fully cognizant of the fact that its
investment in the Company involves a high degree of risk, and Cove Hill
represents that it can afford to bear such risk, including, without
limitation, the risk of losing the entire investment.
4.7 Cove Hill has been advised by the Company that (i) neither the New
Warrants nor the Common Stock underlying the New Warrants (collectively, the
"Securities") have been registered under the Securities Act, and that the
Securities will be issued on the basis of the statutory exemption provided by
Section 4(2) of the Securities Act or Regulation D promulgated thereunder, or
both, relating to transactions by an issuer not involving any public offering,
and under similar exemptions under applicable state securities laws; (ii) none
of the Securities have been registered or qualified with any federal or state
agency or self-regulatory organization, and (iii) the Company's reliance on
exemptions from federal and state registration or qualification requirements
is based in part upon the representations made by Cove Hill contained in this
Agreement.
4.8 Cove Hill has been advised by the Company of, and/or it is otherwise
familiar with, the nature of the limitations on the transfer of the Securities
imposed by the Securities Act and the Rules and Regulations promulgated
thereunder. In particular, Cove Hill agrees that no sale, assignment or
transfer of any of the Securities shall be valid or effective (and agrees to
not so sell, assign or transfer any of the Securities), and the Company shall
not be required to give any effect to such a sale, assignment or transfer,
unless the sale, assignment or transfer is (i) registered under the Securities
Act, it being understood that none of the Securities are currently registered
for sale; or (ii) made in accordance with all the requirements and limitations
of Rule 144 under the Securities Act. Cove Hill acknowledges that the
Securities shall be subject to a stop transfer order and that the certificate
or certificates evidencing the Securities shall bear the following legend (and
such other legends as may be required by state blue sky laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD,
PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (1) A
REGISTRATION STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND
IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (2) PURSUANT TO A
SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A
HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL
TO THE COMPANY, OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE
COMPANY, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH
2
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ALL APPLICABLE PROVISIONS OF THE ACT AS WELL AS ANY APPLICABLE "BLUE
SKY" OR SIMILAR STATE SECURITIES LAW.
4.9 Cove Hill is acquiring the Securities for its own account for
investment and not with a view to the sale or distribution thereof or the
granting of any participation therein. Cove Hill has no present intention of
distributing or selling to others any of such interest or granting any
participation therein.
4.10 It never has been represented, guaranteed or warranted by any of the
Company, the Company's officers, directors, stockholders, employees or agents,
or any other person, whether expressly or by implication, that (i) the Company
or Cove Hill will realize any given percentage of profits and/or amount or
type of consideration, profit or loss as a result of the Company's activities
or Cove Hill's investment; or (ii) the past performance or experience of the
management of the Company, or of any other person, will in any way indicate
the predictable results of the Company's activities or the ownership of the
Securities.
4.11 Cove Hill is not acquiring the Securities as a result of or
subsequent to any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio, or presented at any seminar or meeting, or any
solicitation of a share exchange by a person other than a representative of
the Company with whom Cove Hill had a pre-existing relationship.
4.12 Cove Hill is not relying on the Company with respect to the tax and
other economic considerations of an investment.
5 Indemnification.
5.1 Survival of Representations and Warranties. The representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and shall continue forever thereafter.
5.2 Indemnification for the Benefit of the Company. Cove Hill
acknowledges that it understands the meaning and legal consequences of the
representations and warranties contained in Section 4 hereof, and agrees to
indemnify and hold harmless the Company and each of the Company's officers,
directors, employees and agents of from and against any and all loss, damage
or liability due to or arising out of a breach of any such representation or
warranty.
5.3 Indemnification for the Benefit of Cove Hill. The Company
acknowledges that it understands the meaning and legal consequences of the
representations and warranties contained in Section 3 hereof, and agrees to
indemnify and hold harmless Cove Hill and each of Cove Hill's officers,
directors, employees and agents from and against any and all loss, damage or
liability due to or arising out of a breach of any such representation or
warranty.
6 Company's Right of First Purchase.
6.1 Company's Right of First Purchase. For such time until the closing of
the IPO (the "IPO Closing"), any shares of Common Stock held by Cove Hill
(including, but not limited to, any of the Securities) will be subject to the
Company's right of first purchase. By virtue of that right, such shares of
Common Stock may not be transferred to any person or entity unless such
transfer occurs within the 30 days immediately following either (i) the
expiration of 30 days following written notice by Cove Hill to the Company
identifying the prospective transferee and offering the Company the first
opportunity to purchase such stock at its Fair Market Value (as defined below)
in cash; or (ii) the Company's election to not purchase such shares of Common
Stock after receipt of such notice. This right of first purchase shall
terminate with respect to any shares of Common Stock with respect to which the
Company was offered but did not exercise its right of first purchase. The
Company may assign all or any portion of its right of first purchase to any
one or more of its stockholders, or to a pension or retirement plan or trust
for employees of the Company, who may then exercise the right so assigned. The
Company's right of first purchase shall terminate upon the IPO Closing.
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<PAGE>
6.2 Definition of Fair Market Value. The "Fair Market Value" of Common
Stock will mean the price at which one could reasonably expect such stock to
be sold in an arm's length transaction, for cash, other than on an installment
basis, to a person not employed by, controlled by, in control of or under
common control with the issuer of such stock. Such Fair Market Value will be
that which has currently or most recently been determined for this purpose by
the Board of Directors of the Company, or at the sole discretion of the Board
by an independent appraiser or appraisers selected by the Board, in either
case giving due consideration to recent transactions involving shares of such
stock, if any, the issuer's net worth, prospective earning power and
dividend-paying capacity, the goodwill of the issuer's business, the issuer's
industry position and its management, that industry's economic outlook, the
values of securities of issuers whose stock is publicly traded and which are
engaged in similar businesses, the effect of transfer restrictions to which
such stock may be subject under law and under the applicable terms of any
contract governing such stock, the absence of a public market for such stock
and such other matters as the Board or its appraiser or appraisers deem
pertinent. The determination by the Board or its appraiser or appraisers of
the Fair Market Value will be conclusive and binding notwithstanding the
possibility that other persons might make a different determination. If the
Fair Market Value to be used was thus fixed more than sixteen months prior to
the day as of which Fair Market Value is being determined, it will in any
event be no less than the book value of the stock being valued at the end of
the most recent period for which financial statements of the Company are
available.
7 Miscellaneous.
7.1 Confidentiality. Cove Hill hereby acknowledges and agrees that this
Agreement is confidential, and that its terms and contents shall not be
disclosed to any person other than through a press release of the Company.
7.2 Payment of Expenses. Each of the Parties hereto shall pay all
expenses and disbursements incurred by its officers, employees, attorneys,
accountants, financial advisers and other agents and representatives in
connection with this Agreement and the performance of its obligations
hereunder.
7.3 Notices. Any notices required or permitted to be given to, or served
upon, either Party hereto pursuant to this Agreement shall be sufficiently
given or served if sent to such Party by registered or certified mail,
addressed to it at its address, as set forth below, or to such other address
as it shall designate by written notice to the other parties addressed as
follows:
VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
Attn: William Wheaton III, President and CEO
Cove Hill Consulting, Inc.
200 East 94th Street, Suite 117
New York, NY 10128
Attn: David Russell, Jr., President
7.4 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
7.5 Entire Agreement. This agreement constitutes the entire agreement
between the Parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the Parties hereto with respect to
the subject matter hereof.
7.6 Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the Party against
whom enforcement of any such
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<PAGE>
modification or agreement is sought. Either Party hereto may, by an instrument
in writing, waive compliance by the other Party with any term or provision of
this Agreement to be performed or complied with by such other Party hereto.
The waiver by any Party of a breach of any term or provision of this Agreement
shall not be construed as a waiver of any subsequent breach.
7.7 Assignment. This Agreement is personal in nature and neither of the
Parties shall, without the written consent of the other, assign or transfer
his or its rights or obligations hereunder to another person or entity, except
as herein expressly provided or permitted and except that the Company may
transfer all or any portion of its rights or obligations hereunder to any of
its affiliates without such prior written consent. Subject to the foregoing
provisions of this Section .7, this Agreement shall be binding upon and inure
to the benefit of the Parties hereto and their respective successors and
assigns.
7.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York and all disputes arising hereunder shall
be adjudicated solely before the courts of New York to whose jurisdiction the
Parties hereto consent.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement and
caused the same to be delivered on their behalf as of the date first above
written.
Cove Hill Consulting, Inc. VCS Technologies, Inc.
By: /s/ David Russell, Jr. By: /s/ William Wheaton
------------------------------- ---------------------------
David Russell, Jr., President William Wheaton, President
and CEO
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<PAGE>
Stock Purchase Agreement (the "Agreement") effective as of August 31, 1998
by and between VCS Technologies, Inc., a Delaware corporation (the "Company"),
and Bruce McArthur, an individual with a business address at 456 Glenbrook Road,
Stamford, CT 06906 ("McArthur"). The Company and McArthur may be referred to
herein collectively as the "Parties" or individually as a "Party."
WHEREAS the Parties have agreed to enter into this Agreement for the
purpose of facilitating a possible initial public offering of securities
currently proposed to be conducted by the Company during 1998,
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, the Parties hereby agree as follows:
1 Acknowledgments. The Parties acknowledge that from time to time the Company
has deferred payments of amounts due to McArthur for accrued salary, commissions
and reimbursable expenses (collectively, the "Company Obligation"). On December
1, 1997, in consideration for McArthur's consent that the Company be permitted
to further defer payment of portions of the Company Obligation, the Company
issued to McArthur warrants (the "Warrants") to purchase an aggregate of 60,000
shares of Company's common stock (the "Common Stock") at an exercise price of
$5.00 per share. The Parties further acknowledge that all references herein to
the Common Stock are effective as of the date of this Agreement. Upon the
effective date (if any) of an anticipated reverse stock split of the outstanding
Common Stock to be effected following the date of this Agreement, all references
to the Common Stock contained herein shall be deemed adjusted in accordance with
such reverse stock split.
2 Purchase of Common Stock. Effective as of the date hereof, McArthur hereby
agrees to purchase from the Company, and the Company agrees to sell to McArthur,
60,000 shares of Common Stock. As payment therefor, McArthur hereby (i) waives
the Company Obligation and releases the Company from any obligation to pay any
portion thereof; and (ii) surrenders the Warrants to the Company for
cancellation. Accordingly, the Warrants are hereby canceled, null and void, and
of no further effect. The Company shall deliver to McArthur a certificate
representing the shares of Common Stock purchased hereby as soon as practicable
following the date of this Agreement.
3 Representations and Warranties of the Company. The Company represents and
warrants to McArthur as follows:
3.1 The Company is duly organized, validly existing and in good standing
under the laws of the state of Delaware with full power and authority to operate
its business as currently conducted.
3.2 The authorized capital stock of the Company consists of 9,990,000
shares of Common Stock and 10,000 shares of Preferred Stock. Each outstanding
share of Common Stock is duly authorized, validly issued, fully paid and
non-assessable, and has not been issued and is not owned or held in violation of
any preemptive rights of stockholders. No shares of Preferred Stock are
currently outstanding.
3.3 The Company has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. This Agreement has been duly
authorized by the Company and, when executed and delivered by the Company will
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
3.4 No consent, authorization, approval, order, license, certificate or
permit of or from, or declaration or filing with, any federal, state, local or
other governmental authority, or any court or any other tribunal, is required by
the Company for the execution, delivery or performance by the Company under this
Agreement (except for such filings as may be required under federal and state
securities laws).
<PAGE>
3.5 The shares of Common Stock purchased hereby have been duly reserved for
such issuance. Such shares are duly authorized and are validly issued, fully
paid and non-assessable, and have not been issued in violation of any preemptive
or other rights of stockholders or other parties.
4 Representations and Warranties of McArthur. McArthur hereby represents and
warrants to the Company as follows:
4.1 McArthur is a bona fide resident of the state set forth in Section 7.3
of this Agreement and is legally competent to execute this Agreement.
4.2 McArthur has received, read carefully and is familiar with this
Agreement. Respecting the Company, McArthur is familiar with the Company's
business and financial condition and any other matters relating to the
transactions contemplated hereby; McArthur has received all materials which have
been requested by him, has had a reasonable opportunity to ask questions of the
Company and its representatives, and the Company has answered all inquiries that
McArthur has put to it. McArthur has taken all the steps necessary to evaluate
the merits and risks of the transactions effected hereby.
4.3 McArthur has been advised by the Company to consider retaining legal
counsel in connection with the preparation and the execution of this Agreement.
4.4 McArthur represents that he is an "accredited investor" as such term is
defined in Rule 501 of the Rules and Regulations promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
4.5 McArthur has such knowledge and experience in finance, securities,
investments and other business matters so as to be able to evaluate the merits
and risks of his investment in the Company.
4.6 McArthur has adequate means of providing for his current and
foreseeable future needs and has no need for liquidity of his investment in the
Company. McArthur recognizes and is fully cognizant of the fact that his
investment in the Company involves a high degree of risk, and McArthur
represents that he can afford to bear such risk, including, without limitation,
the risk of losing the entire investment.
4.7 McArthur has been advised by the Company that (i) shares of Common
Stock purchased hereby (the "Securities") have not been registered under the
Securities Act, and that the Securities will be issued on the basis of the
statutory exemption provided by Section 4(2) of the Securities Act or Regulation
D promulgated thereunder, or both, relating to transactions by an issuer not
involving any public offering, and under similar exemptions under applicable
state securities laws; (ii) none of the Securities have been registered or
qualified with any federal or state agency or self-regulatory organization, and
(iii) the Company's reliance on exemptions from federal and state registration
or qualification requirements is based in part upon the representations made by
McArthur contained in this Agreement.
4.8 McArthur has been advised by the Company of, and/or he is otherwise
familiar with, the nature of the limitations on the transfer of the Securities
imposed by the Securities Act and the Rules and Regulations promulgated
thereunder. In particular, McArthur agrees that no sale, assignment or transfer
of any of the Securities shall be valid or effective (and agrees to not so sell,
assign or transfer any of the Securities), and the Company shall not be required
to give any effect to such a sale, assignment or transfer, unless the sale,
assignment or transfer is (i) registered under the Securities Act, it being
understood that none of the Securities are currently registered for sale; or
(ii) made in accordance with all the requirements and limitations of Rule 144
under the Securities Act. McArthur acknowledges that the Securities shall be
subject to a stop transfer order and that the certificate or certificates
evidencing the Securities shall bear the following legend (and such other
legends as may be required by state blue sky laws):
2
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (1) A REGISTRATION
STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH
RESPECT TO THESE SECURITIES, OR (2) PURSUANT TO A SPECIFIC EXEMPTION
FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST
HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS
WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW.
4.9 McArthur is acquiring the Securities for his own account for investment
and not with a view to the sale or distribution thereof or the granting of any
participation therein. McArthur has no present intention of distributing or
selling to others any of such interest or granting any participation therein.
4.10 It never has been represented, guaranteed or warranted by any of the
Company, the Company's officers, directors, stockholders, employees or agents,
or any other person, whether expressly or by implication, that (i) the Company
or McArthur will realize any given percentage of profits and/or amount or type
of consideration, profit or loss as a result of the Company's activities or
McArthur's investment; or (ii) the past performance or experience of the
management of the Company, or of any other person, will in any way indicate the
predictable results of the Company's activities or the ownership of the
Securities.
4.11 McArthur is not acquiring the Securities as a result of or subsequent
to any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, or
presented at any seminar or meeting, or any solicitation of a share exchange by
a person other than a representative of the Company with whom McArthur had a
pre-existing relationship.
4.12 McArthur is not relying on the Company with respect to the tax and
other economic considerations of an investment.
5 Indemnification.
5.1 Survival of Representations and Warranties. The representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and shall continue forever thereafter.
5.2 Indemnification for the Benefit of the Company. McArthur acknowledges
that he understands the meaning and legal consequences of the representations
and warranties contained in Section 4 hereof, and agrees to indemnify and hold
harmless the Company and each of the Company's officers, directors, employees
and agents from and against any and all loss, damage or liability due to or
arising out of a breach of any such representation or warranty.
5.3 Indemnification for the Benefit of McArthur. The Company acknowledges
that it understands the meaning and legal consequences of the representations
and warranties contained in Section 3 hereof, and agrees to indemnify and hold
harmless McArthur from and against any and all loss, damage or liability due to
or arising out of a breach of any such representation or warranty.
6 Company's Right of First Purchase.
6.1 Company's Right of First Purchase. For such time until the date prior
to the effective date of the registration statement filed in connection with the
Company's initial public offering, any shares of Common Stock held by McArthur
(including, but not limited to, any of the Securities) will be subject to the
Company's right of first purchase. By virtue of that right, (a) such shares of
Common Stock may
3
<PAGE>
not be transferred during McArthur's lifetime to any person other than members
of McArthur's Immediate Family (as defined below), a partnership whose members
are McArthur's and/or members of McArthur's Immediate Family, or a trust for the
benefit of McArthur and/or members of McArthur's Immediate Family, unless such
transfer occurs within the 30 days immediately following either (i) the
expiration of 30 days following written notice by McArthur to the Company
identifying the prospective transferee and offering the Company the first
opportunity to purchase such stock at its Fair Market Value (as defined below)
in cash; or (ii) the Company's election to not purchase such shares of Common
Stock after receipt of such notice; and (b) upon McArthur's death, the Company
will have the right to purchase all or some of such stock at its Fair Market
Value within nine months after the date of death. This right of first purchase
will continue to apply to any such shares of Common Stock after the transfer
during McArthur's lifetime of such shares of Common Stock to a member of
McArthur's Immediate Family or to a family partnership or trust as aforesaid,
and after any transfer of such shares of Common Stock with respect to which the
Company expressly waived its right of first purchase without also waiving it as
to any subsequent transfers thereof, but it will not apply after a transfer of
such shares of Common Stock with respect to which the Company was offered but
did not exercise or waive its right of first purchase or more than nine months
after McArthur's death. The Company may assign all or any portion of its right
of first purchase to any one or more of its stockholders, or to a pension or
retirement plan or trust for employees of the Company, who may then exercise the
right so assigned. The Company's right of first purchase shall terminate on the
date prior to the effective date of the registration statement filed in
connection with the Company's initial public offering.
6.2 Certain Definitions. In addition to the terms defined elsewhere in this
Agreement, the following terms will have the following definitions:
6.2.1 Fair Market Value. The "Fair Market Value" of Common Stock will
mean the price at which one could reasonably expect such stock to be sold in an
arm's length transaction, for cash, other than on an installment basis, to a
person not employed by, controlled by, in control of or under common control
with the issuer of such stock. Such Fair Market Value will be that which has
currently or most recently been determined for this purpose by the Board of
Directors of the Company, or at the sole discretion of the Board by an
independent appraiser or appraisers selected by the Board, in either case giving
due consideration to recent transactions involving shares of such stock, if any,
the issuer's net worth, prospective earning power and dividend-paying capacity,
the goodwill of the issuer's business, the issuer's industry position and its
management, that industry's economic outlook, the values of securities of
issuers whose stock is publicly traded and which are engaged in similar
businesses, the effect of transfer restrictions to which such stock may be
subject under law and under the applicable terms of any contract governing such
stock, the absence of a public market for such stock and such other matters as
the Board or its appraiser or appraisers deem pertinent. The determination by
the Board or its appraiser or appraisers of the Fair Market Value will be
conclusive and binding notwithstanding the possibility that other persons might
make a different determination. If the Fair Market Value to be used was thus
fixed more than sixteen months prior to the day as of which Fair Market Value is
being determined, it will in any event be no less than the book value of the
stock being valued at the end of the most recent period for which financial
statements of the Company are available.
6.2.2 Immediate Family. An individual's "Immediate Family" includes
only his or her spouse, parents or other ancestors, and children and other
direct descendants of that individual or of his or her spouse (including such
ancestors and descendants by adoption).
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<PAGE>
7 Miscellaneous.
7.1 Confidentiality. McArthur hereby acknowledges and agrees that this
Agreement is confidential, and that its terms and contents shall not be
disclosed to any person other than through a press release of the Company.
7.2 Payment of Expenses. Except as expressly otherwise provided, each of
the Parties hereto shall pay all expenses and disbursements incurred by its
officers, employees, attorneys, accountants, financial advisers and other agents
and representatives in connection with this Agreement and the performance of its
obligations hereunder.
7.3 Notices. Any notices required or permitted to be given to, or served
upon, either Party hereto pursuant to this Agreement shall be sufficiently given
or served if sent to such Party by registered or certified mail, addressed to it
at its address, as set forth below, or to such other address as it shall
designate by written notice to the other parties addressed as follows:
VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
Att: William Wheaton III, President and CEO
Bruce McArthur
456 Glenbrook Road
Stamford, CT 06906
7.4 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
7.5 Entire Agreement. This agreement constitutes the entire agreement
between the Parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the Parties hereto with respect to
the subject matter hereof.
7.6 Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the Party against
whom enforcement of any such modification or agreement is sought. Either Party
hereto may, by an instrument in writing, waive compliance by the other Party
with any term or provision of this Agreement to be performed or complied with by
such other Party hereto. The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any subsequent
breach.
7.7 Assignment. This Agreement is personal in nature and neither of the
Parties shall, without the written consent of the other, assign or transfer his
or its rights or obligations hereunder to another person or entity, except as
herein expressly provided or permitted and except that the Company may transfer
all or any portion of its rights or obligations hereunder to any of its
affiliates without such prior written consent. Subject to the foregoing
provisions of this Section 7.7, this Agreement shall be binding upon and inure
to the benefit of the Parties hereto and their respective successors and
assigns.
7.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York and all disputes arising hereunder shall be
adjudicated solely before the courts of New York to whose jurisdiction the
Parties hereto consent.
5
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement and
caused the same to be delivered on their behalf as of the date first above
written.
Bruce McArthur VCS Technologies, Inc.
/s/ Bruce McArthur By: /s/ William Wheaton
- ----------------------------- ----------------------------------
Bruce McArthur William Wheaton, President and CEO
6
<PAGE>
Investment Restructuring Agreement (the "Agreement") dated as of August 28,
1998 by and between VCS Technologies, Inc., a Delaware corporation (the
"Company"), and Daniel Piergentili, an individual with a residence at 2424 9th
Avenue #5308, Longmont, CO 80503 ("Piergentili"). The Company and Piergentili
may be referred to herein collectively as the "Parties" or individually as a
"Party."
WHEREAS the Parties have agreed to restructure Piergentili's existing
investment in the Company for the purpose of facilitating a possible initial
public offering of securities (the "IPO") currently proposed to be conducted by
the Company during 1998,
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, the Parties hereby agree as follows:
1 Acknowledgments. The Parties acknowledge that the provisions of this Section 1
accurately and completely list and describe all of the Company's securities
owned by Piergentili (together with all of the additional rights and privileges
pertaining thereto) and all of the indebtedness owed to Piergentili by the
Company. The Parties further acknowledge that all references herein to the
Company's common stock (the "Common Stock") are effective as of the date of this
Agreement. Upon the effective date (if any) of an anticipated reverse stock
split of the outstanding Common Stock to be effected following the date of this
Agreement, all references to the Common Stock contained herein shall be deemed
adjusted in accordance with such reverse stock split. Accordingly, the Parties
acknowledge the following:
1.1 Warrants to Purchase Common Stock. Piergentili owns warrants (the
"Warrants") to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price of $2.00 per share. The Warrants were issued to Piergentili by
the Company on January 19, 1998.
1.2 Convertible Note. Piergentili holds a convertible note issued by the
Company on January 19, 1998 in the principal amount of $100,000 (the
"Convertible Note"). The total amount of unpaid interest accrued on the
Convertible Note as of the date of this Agreement is $7,300. Except for the
principal amount of the Convertible Note and the unpaid interest accrued
thereon, there is no indebtedness owed by the Company to Piergentili.
1.3 Existing Registration Rights. Piergentili holds certain registration
rights (the "Existing Registration Rights") granted to him by the Company with
respect to the Common Stock underlying and issuable upon the exercise the
Warrants and the conversion of the Convertible Note.
2 Restructuring of Piergentili's Investment in the Company. Piergentili hereby
agrees as follows:
2.1 Conversion of the Convertible Note into Common Stock. The entire
principal amount of the Convertible Note, and the entire amount of unpaid
interest accrued thereon, is hereby converted into 53,650 fully-paid and
non-assessable shares of Common Stock (the "Conversion Shares"). Simultaneously
with the execution and delivery of this Agreement (i) Piergentili shall deliver
to the Company for cancellation the original Convertible Note; and (ii) the
Company shall deliver to Piergentili a certificate evidencing the Conversion
Shares.
2.2 Cancellation of the Warrants. The Warrants are hereby canceled, null
and void, and of no further effect. Simultaneously with the execution and
delivery of this Agreement Piergentili shall deliver to the Company for
cancellation the original certificate evidencing the Warrants.
2.3 Termination of the Existing Registration Rights. The Existing
Registration Rights are hereby terminated, null and void, and of no further
effect.
3 Consideration. In consideration for the restructuring of Piergentili's
investment in the Company as provided in Section 2 above, the Company hereby
agrees to issue to Piergentili warrants to purchase an aggregate of 25,000
shares of Common Stock, such warrants exercisable at an exercise price of $0.10
per share for a period of five years following the date hereof (the "New
Warrants"). The Company will deliver to Piergentili a certificate evidencing the
New Warrants as soon as practicable following the date of this Agreement.
<PAGE>
4 Representations and Warranties of the Company. The Company represents and
warrants to Piergentili as follows:
4.1 The Company is duly organized, validly existing and in good standing
under the laws of the state of Delaware with full power and authority to operate
its business as currently conducted.
4.2 The authorized capital stock of the Company consists of 9,990,000
shares of Common Stock and 10,000 shares of Preferred Stock. Each outstanding
share of Common Stock is duly authorized, validly issued, fully paid and
non-assessable, and has not been issued and is not owned or held in violation of
any preemptive rights of stockholders. No shares of Preferred Stock are
currently outstanding.
4.3 The Company has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. This Agreement has been duly
authorized by the Company and, when executed and delivered by the Company will
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
4.4 No consent, authorization, approval, order, license, certificate or
permit of or from, or declaration or filing with, any federal, state, local or
other governmental authority, or any court or any other tribunal, is required by
the Company for the execution, delivery or performance by the Company under this
Agreement (except for such filings as may be required under federal and state
securities laws).
4.5 The Conversion Shares and the Common Stock underlying the New Warrants
have been duly reserved for such issuance. Such shares are duly authorized and
are, or will be, validly issued, fully paid and non-assessable, and have not
been, nor will be, issued in violation of any preemptive or other rights of
stockholders or other parties.
5 Representations and Warranties of Piergentili. Piergentili hereby
represents and warrants to the Company as follows:
5.1 Piergentili is a bona fide resident of the state set forth in Section
8.3 of this Agreement and is legally competent to execute this Agreement.
5.2 Piergentili has received, read carefully and is familiar with this
Agreement. Respecting the Company, Piergentili is familiar with the Company's
business and financial condition and any other matters relating to the
transactions contemplated hereby; Piergentili has received all materials which
have been requested by him, has had a reasonable opportunity to ask questions of
the Company and its representatives, and the Company has answered all inquiries
that Piergentili has put to it. Piergentili has taken all the steps necessary to
evaluate the merits and risks of the refinancing transactions contemplated
hereby.
5.3 Piergentili has been advised by the Company to consider retaining legal
counsel in connection with the preparation and the execution of this Agreement.
5.4 Piergentili represents that he is an "accredited investor" as such term
is defined in Rule 501 of the Rules and Regulations promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
5.5 Piergentili has such knowledge and experience in finance, securities,
investments and other business matters so as to be able to evaluate the merits
and risks of his investment in the Company.
5.6 Piergentili has adequate means of providing for his current and
foreseeable future needs and has no need for liquidity of his investment in the
Company. Piergentili recognizes and is fully cognizant of the fact that his
investment in the Company involves a high degree of risk, and Piergentili
represents that he can afford to bear such risk, including, without limitation,
the risk of losing the entire investment.
2
<PAGE>
5.7 Piergentili has been advised by the Company that (i) neither the
Conversion Shares, the New Warrants, nor the Common Stock underlying the New
Warrants (collectively, the "Securities") have been registered under the
Securities Act, and that the Securities will be issued on the basis of the
statutory exemption provided by Section 4(2) of the Securities Act or Regulation
D promulgated thereunder, or both, relating to transactions by an issuer not
involving any public offering, and under similar exemptions under applicable
state securities laws; (ii) none of the Securities have been registered or
qualified with any federal or state agency or self-regulatory organization, and
(iii) the Company's reliance on exemptions from federal and state registration
or qualification requirements is based in part upon the representations made by
Piergentili contained in this Agreement.
5.8 Piergentili has been advised by the Company of, and/or he is otherwise
familiar with, the nature of the limitations on the transfer of the Securities
imposed by the Securities Act and the Rules and Regulations promulgated
thereunder. In particular, Piergentili agrees that no sale, assignment or
transfer of any of the Securities shall be valid or effective (and agrees to not
so sell, assign or transfer any of the Securities), and the Company shall not be
required to give any effect to such a sale, assignment or transfer, unless the
sale, assignment or transfer is (i) registered under the Securities Act, it
being understood that none of the Securities are currently registered for sale;
or (ii) made in accordance with all the requirements and limitations of Rule 144
under the Securities Act. Piergentili acknowledges that the Securities shall be
subject to a stop transfer order and that the certificate or certificates
evidencing the Securities shall bear the following legend (and such other
legends as may be required by state blue sky laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (1) A REGISTRATION
STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH
RESPECT TO THESE SECURITIES, OR (2) PURSUANT TO A SPECIFIC EXEMPTION
FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST
HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS
WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW.
5.9 Piergentili is acquiring the Securities for his own account for
investment and not with a view to the sale or distribution thereof or the
granting of any participation therein. Piergentili has no present intention of
distributing or selling to others any of such interest or granting any
participation therein.
5.10 It never has been represented, guaranteed or warranted by any of the
Company, the Company's officers, directors, stockholders, employees or agents,
or any other person, whether expressly or by implication, that (i) the Company
or Piergentili will realize any given percentage of profits and/or amount or
type of consideration, profit or loss as a result of the Company's activities or
Piergentili's investment; or (ii) the past performance or experience of the
management of the Company, or of any other person, will in any way indicate the
predictable results of the Company's activities or the ownership of the
Securities.
5.11 Piergentili is not acquiring the Securities as a result of or
subsequent to any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio, or presented at any seminar or meeting, or any solicitation
of a share exchange by a person other than a representative of the Company with
whom Piergentili had a pre-existing relationship.
5.12 Piergentili is not relying on the Company with respect to the tax and
other economic considerations of an investment.
3
<PAGE>
6 Indemnification.
6.1 Survival of Representations and Warranties. The representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and shall continue forever thereafter.
6.2 Indemnification for the Benefit of the Company. Piergentili
acknowledges that he understands the meaning and legal consequences of the
representations and warranties contained in Section 5 hereof, and agrees to
indemnify and hold harmless the Company and each of the Company's officers,
directors, employees and agents of from and against any and all loss, damage or
liability due to or arising out of a breach of any such representation or
warranty.
6.3 Indemnification for the Benefit of Piergentili. The Company
acknowledges that it understands the meaning and legal consequences of the
representations and warranties contained in Section 4 hereof, and agrees to
indemnify and hold harmless Piergentili from and against any and all loss,
damage or liability due to or arising out of a breach of any such representation
or warranty.
7 Company's Right of First Purchase.
7.1 Company's Right of First Purchase. For such time until the IPO Closing,
any shares of Common Stock held by Piergentili (including, but not limited to,
any of the Securities) will be subject to the Company's right of first purchase.
By virtue of that right, (a) such shares of Common Stock may not be transferred
during Piergentili's lifetime to any person other than members of Piergentili's
Immediate Family (as defined below), a partnership whose members are
Piergentili's and/or members of Piergentili's Immediate Family, or a trust for
the benefit of Piergentili and/or members of Piergentili's Immediate Family,
unless such transfer occurs within the 30 days immediately following either (i)
the expiration of 30 days following written notice by Piergentili to the Company
identifying the prospective transferee and offering the Company the first
opportunity to purchase such stock at its Fair Market Value (as defined below)
in cash; or (ii) the Company's election to not purchase such shares of Common
Stock after receipt of such notice; and (b) upon Piergentili's death, the
Company will have the right to purchase all or some of such stock at its Fair
Market Value within nine months after the date of death. This right of first
purchase will continue to apply to any such shares of Common Stock after the
transfer during Piergentili's lifetime of such shares of Common Stock to a
member of Piergentili's Immediate Family or to a family partnership or trust as
aforesaid, and after any transfer of such shares of Common Stock with respect to
which the the Company expressly waived its right of first purchase without also
waiving it as to any subsequent transfers thereof, but it will not apply after a
transfer of such shares of Common Stock with respect to which the Company was
offered but did not exercise or waive its right of first purchase or more than
nine months after Piergentili's death. The Company may assign all or any portion
of its right of first purchase to any one or more of its stockholders, or to a
pension or retirement plan or trust for employees of the Company, who may then
exercise the right so assigned. The Company's right of first purchase shall
terminate upon the IPO Closing.
7.2 Certain Definitions. In addition to the terms defined elsewhere in this
Agreement, the following terms will have the following definitions:
7.2.1 Fair Market Value. The "Fair Market Value" of Common Stock will
mean the price at which one could reasonably expect such stock to be sold in an
arm's length transaction, for cash, other than on an installment basis, to a
person not employed by, controlled by, in control of or under common control
with the issuer of such stock. Such Fair Market Value will be that which has
currently or most recently been determined for this purpose by the Board of
Directors of the Company, or at the sole discretion of the Board by an
independent appraiser or appraisers selected by the Board, in either case giving
due consideration to recent transactions involving shares of such stock, if any,
the issuer's net worth, prospective earning power and dividend-paying capacity,
the goodwill of the issuer's business, the issuer's industry position and its
management, that industry's economic outlook, the values of securities of
issuers whose stock is publicly traded and which are engaged in similar
businesses, the effect of transfer restrictions to which such stock may be
subject under law and under
4
<PAGE>
the applicable terms of any contract governing such stock, the absence of a
public market for such stock and such other matters as the Board or its
appraiser or appraisers deem pertinent. The determination by the Board or its
appraiser or appraisers of the Fair Market Value will be conclusive and binding
notwithstanding the possibility that other persons might make a different
determination. If the Fair Market Value to be used was thus fixed more than
sixteen months prior to the day as of which Fair Market Value is being
determined, it will in any event be no less than the book value of the stock
being valued at the end of the most recent period for which financial statements
of the Company are available.
7.2.2 Immediate Family. An individual's "Immediate Family" includes
only his or her spouse, parents or other ancestors, and children and other
direct descendants of that individual or of his or her spouse (including such
ancestors and descendants by adoption).
8 Miscellaneous.
8.1 Confidentiality. Piergentili hereby acknowledges and agrees that this
Agreement is confidential, and that its terms and contents shall not be
disclosed to any person other than through a press release of the Company.
8.2 Payment of Expenses. Except as expressly otherwise provided, each of
the Parties hereto shall pay all expenses and disbursements incurred by its
officers, employees, attorneys, accountants, financial advisers and other agents
and representatives in connection with this Agreement and the performance of its
obligations hereunder.
8.3 Notices. Any notices required or permitted to be given to, or served
upon, either Party hereto pursuant to this Agreement shall be sufficiently given
or served if sent to such Party by registered or certified mail, addressed to it
at its address, as set forth below, or to such other address as it shall
designate by written notice to the other parties addressed as follows:
VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
Att: William Wheaton III, President and CEO
Daniel Piergentili
2424 9th Avenue #5308
Longmont, CO 80503
8.4 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
8.5 Entire Agreement. This agreement constitutes the entire agreement
between the Parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the Parties hereto with respect to
the subject matter hereof.
8.6 Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the Party against
whom enforcement of any such modification or agreement is sought. Either Party
hereto may, by an instrument in writing, waive compliance by the other Party
with any term or provision of this Agreement to be performed or complied with by
such other Party hereto. The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any subsequent
breach.
8.7 Assignment. This Agreement is personal in nature and neither of the
Parties shall, without the written consent of the other, assign or transfer his
or its rights or obligations hereunder to another person or entity, except as
herein expressly provided or permitted and except that the Company may transfer
all or any portion of its rights or obligations hereunder to any of its
affiliates without such prior
5
<PAGE>
written consent. Subject to the foregoing provisions of this Section 8.7, this
Agreement shall be binding upon and inure to the benefit of the Parties hereto
and their respective successors and assigns.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York and all disputes arising hereunder shall be
adjudicated solely before the courts of New York to whose jurisdiction the
Parties hereto consent.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement and
caused the same to be delivered on their behalf as of the date first above
written.
Daniel Piergentili VCS Technologies, Inc.
/s/ Daniel Piergentili By: /s/ William Wheaton
- ---------------------- ----------------------------------
Daniel Piergentili William Wheaton, President and CEO
6
<PAGE>
Warrant Issuance Agreement (the "Agreement") effective as of August 31,
1998 by and between VCS Technologies, Inc., a Delaware corporation (the
"Company"), and Edward E. Vahan, an individual with a business address at c/o
CBSI 128 South Tryon Street, Suite 1995, Charlotte, NC 28202 ("Vahan"). The
Company and Vahan may be referred to herein collectively as the "Parties" or
individually as a "Party."
In consideration of the promises and the mutual covenants contained herein,
the Parties hereby agree as follows:
1 Acknowledgments. The Parties acknowledge that on December 1, 1997, in
consideration for consulting services rendered to the Company by Vahan, the
Company issued to Vahan warrants to purchase 1,000 shares of the Company's
common stock (the "Common Stock") exercisable at an exercise price of $3.00 per
share (the "Existing Warrants"). The Parties further acknowledge that all
references herein to the Common Stock are effective as of the date of this
Agreement. Upon the effective date (if any) of an anticipated reverse stock
split of the outstanding Common Stock to be effected following the date of this
Agreement, all references to the Common Stock contained herein shall be deemed
adjusted in accordance with such reverse stock split.
2 Issuance of New Warrants; Cancellation of Existing Warrants. In consideration
for additional consulting services rendered to the Company by Vahan, and in
consideration for the surrender by Vahan of the Existing Warrants for
cancellation, the Company hereby agrees to issue to Vahan warrants to purchase
an aggregate of 1,000 shares of Common Stock, such warrants exercisable at an
exercise price of $0.10 per share for a period of five years following the date
hereof (the "New Warrants"). The Company will deliver to Vahan a certificate
evidencing the New Warrants as soon as practicable following the date of this
Agreement. The Existing Warrants are hereby canceled, null and void, and of no
further effect.
3 Representations and Warranties of the Company. The Company represents and
warrants to Vahan as follows:
3.1 The Company is duly organized, validly existing and in good standing
under the laws of the state of Delaware with full power and authority to operate
its business as currently conducted.
3.2 The authorized capital stock of the Company consists of 9,990,000
shares of Common Stock and 10,000 shares of Preferred Stock. Each outstanding
share of Common Stock is duly authorized, validly issued, fully paid and
non-assessable, and has not been issued and is not owned or held in violation of
any preemptive rights of stockholders. No shares of Preferred Stock are
currently outstanding.
3.3 The Company has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. This Agreement has been duly
authorized by the Company and, when executed and delivered by the Company will
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
3.4 No consent, authorization, approval, order, license, certificate or
permit of or from, or declaration or filing with, any federal, state, local or
other governmental authority, or any court or any other tribunal, is required by
the Company for the execution, delivery or performance by the Company under this
Agreement (except for such filings as may be required under federal and state
securities laws).
4 Representations and Warranties of Vahan. Vahan hereby represents and warrants
to the Company as follows:
4.1 Vahan is a bona fide resident of the state set forth in Section 7.3 of
this Agreement and is legally competent to execute this Agreement.
<PAGE>
4.2 Vahan has received, read carefully and is familiar with this Agreement.
Respecting the Company, Vahan is familiar with the Company's business and
financial condition and any other matters relating to the transactions
contemplated hereby; Vahan has received all materials which have been requested
by him, has had a reasonable opportunity to ask questions of the Company and its
representatives, and the Company has answered all inquiries that Vahan has put
to it. Vahan has taken all the steps necessary to evaluate the merits and risks
of the refinancing transactions contemplated hereby.
4.3 Vahan has been advised by the Company to consider retaining legal
counsel in connection with the preparation and the execution of this Agreement.
4.4 Vahan represents that he is an "accredited investor" as such term is
defined in Rule 501 of the Rules and Regulations promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
4.5 Vahan has such knowledge and experience in finance, securities,
investments and other business matters so as to be able to evaluate the merits
and risks of his investment in the Company.
4.6 Vahan has adequate means of providing for his current and foreseeable
future needs and has no need for liquidity of his investment in the Company.
Vahan recognizes and is fully cognizant of the fact that his investment in the
Company involves a high degree of risk, and Vahan represents that he can afford
to bear such risk, including, without limitation, the risk of losing the entire
investment.
4.7 Vahan has been advised by the Company that (i) neither the Conversion
Shares, the New Warrants, nor the Common Stock underlying the New Warrants
(collectively, the "Securities") have been registered under the Securities Act,
and that the Securities will be issued on the basis of the statutory exemption
provided by Section 4(2) of the Securities Act or Regulation D promulgated
thereunder, or both, relating to transactions by an issuer not involving any
public offering, and under similar exemptions under applicable state securities
laws; (ii) none of the Securities have been registered or qualified with any
federal or state agency or self-regulatory organization, and (iii) the Company's
reliance on exemptions from federal and state registration or qualification
requirements is based in part upon the representations made by Vahan contained
in this Agreement.
4.8 Vahan has been advised by the Company of, and/or he is otherwise
familiar with, the nature of the limitations on the transfer of the Securities
imposed by the Securities Act and the Rules and Regulations promulgated
thereunder. In particular, Vahan agrees that no sale, assignment or transfer of
any of the Securities shall be valid or effective (and agrees to not so sell,
assign or transfer any of the Securities), and the Company shall not be required
to give any effect to such a sale, assignment or transfer, unless the sale,
assignment or transfer is (i) registered under the Securities Act, it being
understood that none of the Securities are currently registered for sale; or
(ii) made in accordance with all the requirements and limitations of Rule 144
under the Securities Act. Vahan acknowledges that the Securities shall be
subject to a stop transfer order and that the certificate or certificates
evidencing the Securities shall bear the following legend (and such other
legends as may be required by state blue sky laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (1) A REGISTRATION
STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH
RESPECT TO THESE SECURITIES, OR (2) PURSUANT TO A SPECIFIC EXEMPTION
FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST
HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS
WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW.
2
<PAGE>
4.9 Vahan is acquiring the Securities for his own account for investment
and not with a view to the sale or distribution thereof or the granting of any
participation therein. Vahan has no present intention of distributing or selling
to others any of such interest or granting any participation therein.
4.10 It never has been represented, guaranteed or warranted by any of the
Company, the Company's officers, directors, stockholders, employees or agents,
or any other person, whether expressly or by implication, that (i) the Company
or Vahan will realize any given percentage of profits and/or amount or type of
consideration, profit or loss as a result of the Company's activities or Vahan's
investment; or (ii) the past performance or experience of the management of the
Company, or of any other person, will in any way indicate the predictable
results of the Company's activities or the ownership of the Securities.
4.11 Vahan is not acquiring the Securities as a result of or subsequent to
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, or
presented at any seminar or meeting, or any solicitation of a share exchange by
a person other than a representative of the Company with whom Vahan had a
pre-existing relationship.
4.12 Vahan is not relying on the Company with respect to the tax and other
economic considerations of an investment.
5 Indemnification.
5.1 Survival of Representations and Warranties. The representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and shall continue forever thereafter.
5.2 Indemnification for the Benefit of the Company. Vahan acknowledges that
he understands the meaning and legal consequences of the representations and
warranties contained in Section 4 hereof, and agrees to indemnify and hold
harmless the Company and each of the Company's officers, directors, employees
and agents of from and against any and all loss, damage or liability due to or
arising out of a breach of any such representation or warranty.
5.3 Indemnification for the Benefit of Vahan. The Company acknowledges that
it understands the meaning and legal consequences of the representations and
warranties contained in Section 3 hereof, and agrees to indemnify and hold
harmless Vahan from and against any and all loss, damage or liability due to or
arising out of a breach of any such representation or warranty.
6 Company's Right of First Purchase.
6.1 Company's Right of First Purchase. For such time until the IPO Closing,
any shares of Common Stock held by Vahan (including, but not limited to, any of
the Securities) will be subject to the Company's right of first purchase. By
virtue of that right, (a) such shares of Common Stock may not be transferred
during Vahan's lifetime to any person other than members of Vahan's Immediate
Family (as defined below), a partnership whose members are Vahan's and/or
members of Vahan's Immediate Family, or a trust for the benefit of Vahan and/or
members of Vahan's Immediate Family, unless such transfer occurs within the 30
days immediately following either (i) the expiration of 30 days following
written notice by Vahan to the Company identifying the prospective transferee
and offering the Company the first opportunity to purchase such stock at its
Fair Market Value (as defined below) in cash; or (ii) the Company's election to
not purchase such shares of Common Stock after receipt of such notice; and (b)
upon Vahan's death, the Company will have the right to purchase all or some of
such stock at its Fair Market Value within nine months after the date of death.
This right of first purchase will continue to apply to any such shares of Common
Stock after the transfer during Vahan's lifetime of such shares of Common Stock
to a member of Vahan's Immediate Family or to a family partnership or trust as
aforesaid, and after any transfer of such shares of Common Stock with respect to
which the Company expressly waived its right of first purchase without also
waiving it as to any subsequent transfers thereof, but it will not apply after a
transfer of such shares of Common Stock with respect to which the Company was
offered but did not exercise or waive its right of first purchase or
3
<PAGE>
more than nine months after Vahan's death. The Company may assign all or any
portion of its right of first purchase to any one or more of its stockholders,
or to a pension or retirement plan or trust for employees of the Company, who
may then exercise the right so assigned. The Company's right of first purchase
shall terminate upon the IPO Closing.
6.2 Certain Definitions. In addition to the terms defined elsewhere in this
Agreement, the following terms will have the following definitions:
6.2.1 Fair Market Value. The "Fair Market Value" of Common Stock will
mean the price at which one could reasonably expect such stock to be sold in an
arm's length transaction, for cash, other than on an installment basis, to a
person not employed by, controlled by, in control of or under common control
with the issuer of such stock. Such Fair Market Value will be that which has
currently or most recently been determined for this purpose by the Board of
Directors of the Company, or at the sole discretion of the Board by an
independent appraiser or appraisers selected by the Board, in either case giving
due consideration to recent transactions involving shares of such stock, if any,
the issuer's net worth, prospective earning power and dividend-paying capacity,
the goodwill of the issuer's business, the issuer's industry position and its
management, that industry's economic outlook, the values of securities of
issuers whose stock is publicly traded and which are engaged in similar
businesses, the effect of transfer restrictions to which such stock may be
subject under law and under the applicable terms of any contract governing such
stock, the absence of a public market for such stock and such other matters as
the Board or its appraiser or appraisers deem pertinent. The determination by
the Board or its appraiser or appraisers of the Fair Market Value will be
conclusive and binding notwithstanding the possibility that other persons might
make a different determination. If the Fair Market Value to be used was thus
fixed more than sixteen months prior to the day as of which Fair Market Value is
being determined, it will in any event be no less than the book value of the
stock being valued at the end of the most recent period for which financial
statements of the Company are available.
6.2.2 Immediate Family. An individual's "Immediate Family" includes
only his or her spouse, parents or other ancestors, and children and other
direct descendants of that individual or of his or her spouse (including such
ancestors and descendants by adoption).
7 Miscellaneous.
7.1 Confidentiality. Vahan hereby acknowledges and agrees that this
Agreement is confidential, and that its terms and contents shall not be
disclosed to any person other than through a press release of the Company.
7.2 Payment of Expenses. Except as expressly otherwise provided, each of
the Parties hereto shall pay all expenses and disbursements incurred by its
officers, employees, attorneys, accountants, financial advisers and other agents
and representatives in connection with this Agreement and the performance of its
obligations hereunder.
7.3 Notices. Any notices required or permitted to be given to, or served
upon, either Party hereto pursuant to this Agreement shall be sufficiently given
or served if sent to such Party by registered or certified mail, addressed to it
at its address, as set forth below, or to such other address as it shall
designate by written notice to the other parties addressed as follows:
VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
Attn: William Wheaton III, President and CEO
Edward E. Vahan
c/o CBSI
128 South Tryon Street, Suite 1995
Charlotte, NC 28202
4
<PAGE>
7.4 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
7.5 Entire Agreement. This agreement constitutes the entire agreement
between the Parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the Parties hereto with respect to
the subject matter hereof.
7.6 Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the Party against
whom enforcement of any such modification or agreement is sought. Either Party
hereto may, by an instrument in writing, waive compliance by the other Party
with any term or provision of this Agreement to be performed or complied with by
such other Party hereto. The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any subsequent
breach.
7.7 Assignment. This Agreement is personal in nature and neither of the
Parties shall, without the written consent of the other, assign or transfer his
or its rights or obligations hereunder to another person or entity, except as
herein expressly provided or permitted and except that the Company may transfer
all or any portion of its rights or obligations hereunder to any of its
affiliates without such prior written consent. Subject to the foregoing
provisions of this Section 8.7, this Agreement shall be binding upon and inure
to the benefit of the Parties hereto and their respective successors and
assigns.
7.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York and all disputes arising hereunder shall be
adjudicated solely before the courts of New York to whose jurisdiction the
Parties hereto consent.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement and
caused the same to be delivered on their behalf as of the date first above
written.
VCS Technologies, Inc.
/s/ Edward E. Vahan By: /s/ William Wheaton
- ------------------------- --------------------------------------
Edward E. Vahan William Wheaton, President and CEO
5
<PAGE>
Investment Restructuring Agreement (the "Agreement") dated as of August 12,
1998 by and between VCS Technologies, Inc., a Delaware corporation (the
"Company"), and Chaim Sieger, an individual residing at 27-37 27th Street,
Astoria, NY 11102 ("Sieger"). The Company and Sieger may be referred to herein
collectively as the "Parties" or individually as a "Party."
WHEREAS the Parties have agreed to restructure Sieger's existing investment
in the Company for the purpose of facilitating a possible initial public
offering of securities (the "IPO") currently proposed to be conducted by the
Company during 1998,
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, the Parties hereby agree as follows:
1 Acknowledgments. The Parties acknowledge that the provisions of this Section 1
accurately and completely list and describe all of the Company's securities
owned by Sieger (together with all of the additional rights and privileges
pertaining thereto) and all of the indebtedness owed to Sieger by the Company
(except for loans in the aggregate principal amount of $50,000 made to the
Company by Sieger on or after August 14, 1997). The Parties further acknowledge
that all references herein to the Company's common stock (the "Common Stock")
are effective as of the date of this Agreement. Upon the effective date (if any)
of an anticipated reverse stock split of the outstanding Common Stock to be
effected following the date of this Agreement, all references to the Common
Stock contained herein shall be deemed adjusted in accordance with such reverse
stock split. Accordingly, the Parties acknowledge the following:
1.1 Common Stock. Sieger owns 166,700 fully paid and non-assessable shares
of Common Stock.
1.2 Warrants to Purchase Common Stock. Sieger owns of record warrants (the
"Warrants") to purchase an aggregate of 157,967 shares of Common Stock at an
exercise price of $3.00 per share.
1.3 Convertible Debenture. Sieger holds a convertible debenture issued by
the Company on June 1, 1997 in the principal amount of $600,000 (the
"Convertible Debenture"). Since its date of issuance, the Convertible Debenture
has accrued, and continues to accrue, simple interest at the rate of 14% per
annum. The principal amount of the Convertible Debenture is convertible at any
time into an aggregate of 171,429 shares of Common Stock at a conversion ratio
of $3.50 per share.
1.4 Existing Registration Rights. Sieger holds certain registration rights
(the "Existing Registration Rights") granted to him by the Company with respect
to (i) the outstanding Common Stock currently owned by Sieger, and (ii) the
Common Stock underlying and issuable upon the exercise of the Warrants and/or
the conversion of the Convertible Debenture.
1.5 Interest Indebtedness. The Company is obligated to pay to Sieger
certain accrued and unpaid interest (the "Interest Indebtedness"). The Interest
Indebtedness consists entirely of (i) the aggregate amount of $11,025, which is
the total amount of unpaid interest accrued on all loans made by Sieger to the
Company through July 14, 1997; and (ii) all unpaid interest accrued on the
Convertible Debenture from June 1, 1997 through the date 30 days prior to the
First Payment Date (as defined in Section 2 below). The Parties acknowledge that
no interest has accrued or will accrue on any portion of the Interest
Indebtedness.
2 Certain Definitions.
2.1 "IPO Closing" means the receipt by Company of all of the net proceeds
resulting from the IPO.
2.2 "First Payment Date" means (i) if the IPO Closing occurs on or prior to
November 30, 1998, then the first business day of the second full calendar month
following the IPO Closing; or (ii) if the IPO Closing does not occur on or prior
to November 30, 1998, then January 15, 1999.
3 Restructuring of Sieger's Investment in the Company. Sieger hereby agrees as
follows:
<PAGE>
3.1 Cancellation of the Convertible Debenture. As a result of the issuance
of the Term Note as provided in Section 4.1 below, the Convertible Debenture is
hereby canceled, null and void, and of no further effect.
3.2 Cancellation of the Warrants. The Warrants are hereby canceled, null
and void, and of no further effect.
3.3 Termination of the Existing Registration Rights. The Existing
Registration Rights are hereby terminated, null and void, and of no further
effect.
4 Consideration. In consideration for the restructuring of Sieger's investment
in the Company as provided in Section 3 above, the Company hereby agrees as
follows:
4.1 Issuance of Term Note. Simultaneously with the signing of this
Agreement the Company shall deliver to Sieger a fixed-term promissory note in
the principal amount of $600,000 in the form attached hereto as Exhibit A (the
"Term Note"). Commencing on the date 30 days prior to the First Payment Date,
simple interest shall accrue on the unpaid principal amount of the Term Note at
the rate of 14% per annum (computed on the basis of a 360-day year of 12 30-day
months). The entire principal amount and accrued interest of the Term Note shall
be paid to Sieger in 60 equal monthly payments, the first payment due on the
First Payment Date.
4.2 Issuance of Common Stock. The Company agrees to issue to Sieger 157,967
fully paid and non-assessable shares of Common Stock (the "New Shares") upon the
signing of this Agreement. The Company will deliver to Sieger a certificate
evidencing the New Shares as soon as practicable following the date of this
Agreement.
4.3 Grant of Registration Rights. The Company hereby grants to Sieger the
following registration rights: if at any time following the IPO the Company
registers under the Securities Act of 1933, as amended (the "Securities Act"),
any of the Common Stock owned by William Wheaton III ("Wheaton"), the Company
will include in such registration statement an amount of Sieger's Common Stock
equal in proportion to Sieger's total ownership of Common Stock as the amount of
Wheaton's registered Common Stock bears to Wheaton's total ownership of Common
Stock. The Company shall bear all of the expenses incurred in connection with
the such registration, except any commissions which may be due to any person for
the sale of Sieger's Common Stock shall be paid directly by Sieger.
5 Payment of the Interest Indebtedness. The Parties agree that the Company shall
pay the Interest Indebtedness to Sieger as follows: (i) if the IPO Closing
occurs on or prior to November 30, 1998, then in a single lump sum cash payment
made on the last business day of the calendar month in which the IPO Closing
occurs; or (ii) if the IPO Closing does not occur on or prior to November 30,
1998, then in 12 equal monthly payments, the first payment due on January 15,
1999. No interest will accrue on the Interest Indebtedness.
6 Representations and Warranties of the Company. The Company represents and
warrants to Sieger as follows:
6.1 The Company is duly organized, validly existing and in good standing
under the laws of the state of Delaware with full power and authority to operate
its business as currently conducted.
6.2 The authorized capital stock of the Company consists of 9,990,000
shares of Common Stock and 10,000 shares of Preferred Stock. Each outstanding
share of Common Stock is duly authorized, validly issued, fully paid and
non-assessable, and has not been issued and is not owned or held in violation of
any preemptive rights of stockholders. No shares of Preferred Stock are
currently outstanding.
2
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6.3 The Company has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. This Agreement has been duly
authorized by the Company and, when executed and delivered by the Company will
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
6.4 No consent, authorization, approval, order, license, certificate or
permit of or from, or declaration or filing with, any federal, state, local or
other governmental authority, or any court or any other tribunal, is required by
the Company for the execution, delivery or performance by the Company under this
Agreement (except for such filings as may be required under federal and state
securities laws).
6.5 The New Shares issued to Sieger pursuant to Section 4.2 above have been
duly reserved for such issuance. Such shares are duly authorized and validly
issued, fully paid and non-assessable, and have not been issued in violation of
any preemptive or other rights of stockholders or other parties.
7 Representations and Warranties of Sieger. Sieger hereby represents and
warrants to the Company as follows:
7.1 Sieger is a bona fide resident of the state set forth in Section 10.3
of this Agreement and is legally competent to execute this Agreement.
7.2 Sieger has received, read carefully and is familiar with this
Agreement. Respecting the Company, Sieger is familiar with the Company's
business and financial condition and any other matters relating to the
transactions contemplated hereby; Sieger has received all materials which have
been requested by him, has had a reasonable opportunity to ask questions of the
Company and its representatives, and the Company has answered all inquiries that
Sieger has put to it. Sieger has taken all the steps necessary to evaluate the
merits and risks of the refinancing transactions contemplated hereby.
7.3 Sieger has been advised by the Company to consider retaining legal
counsel in connection with the preparation and the execution of this Agreement.
7.4 Sieger represents that he is an "accredited investor" as such term is
defined in Rule 501 of the Rules and Regulations promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
7.5 Sieger has such knowledge and experience in finance, securities,
investments and other business matters so as to be able to evaluate the merits
and risks of his investment in the Company.
7.6 Sieger has adequate means of providing for his current and foreseeable
future needs and has no need for liquidity of his investment in the Company.
Sieger recognizes and is fully cognizant of the fact that his investment in the
Company involves a high degree of risk, and Sieger represents that he can afford
to bear such risk, including, without limitation, the risk of losing the entire
investment.
7.7 Sieger has been advised by the Company that (i) neither the New Shares
nor the Term Note have been registered under the Securities Act, and that the
New Shares and the Term Note will be issued on the basis of the statutory
exemption provided by Section 4(2) of the Securities Act or Regulation D
promulgated thereunder, or both, relating to transactions by an issuer not
involving any public offering, and under similar exemptions under applicable
state securities laws; (ii) neither the New Shares nor the Term Note has been
registered or qualified with any federal or state agency or self-regulatory
organization, and (iii) the Company's reliance on exemptions from federal and
state registration or qualification requirements is based in part upon the
representations made by Sieger contained in this Agreement.
7.8 Sieger has been advised by the Company of, and/or he is otherwise
familiar with, the nature of the limitations on the transfer of the New Shares
and the Term Note imposed by the Securities Act and the rules and regulations
promulgated thereunder. In particular, Sieger agrees that no sale,
3
<PAGE>
assignment or transfer of any of the New Shares or the Term Note shall be valid
or effective (and agrees to not so sell, assign or transfer any of the New
Shares or the Term Note), and the Company shall not be required to give any
effect to such a sale, assignment or transfer, unless the sale, assignment or
transfer is (i) registered under the Securities Act, it being understood that
neither the New Shares nor the Term Note are currently registered for sale; or
(ii) made in accordance with all the requirements and limitations of Rule 144
under the Securities Act. Sieger acknowledges that the New Shares and the Term
Note shall be subject to a stop transfer order and that the certificate or
certificates evidencing the New Shares and the Term Note shall bear the
following legend (and such other legends as may be required by state blue sky
laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (1) A REGISTRATION
STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH
RESPECT TO THESE SECURITIES, OR (2) PURSUANT TO A SPECIFIC EXEMPTION
FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST
HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS
WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW.
7.9 Sieger is acquiring the New Shares and the Term Note for his own
account for investment and not with a view to the sale or distribution thereof
or the granting of any participation therein. Sieger has no present intention of
distributing or selling to others any of such interest or granting any
participation therein.
7.10 It never has been represented, guaranteed or warranted by any of the
Company, the Company's officers, directors, stockholders, employees or agents,
or any other person, whether expressly or by implication, that (i) the Company
or Sieger will realize any given percentage of profits and/or amount or type of
consideration, profit or loss as a result of the Company's activities or
Sieger's investment; or (ii) the past performance or experience of the
management of the Company, or of any other person, will in any way indicate the
predictable results of the Company's activities or the ownership of the New
Shares or the Term Note.
7.11 Sieger is not acquiring the New Shares or the Term Note as a result of
or subsequent to any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio, or presented at any seminar or meeting, or any solicitation
of a share exchange by a person other than a representative of the Company with
whom Sieger had a pre-existing relationship.
7.12 Sieger is not relying on the Company with respect to the tax and other
economic considerations of an investment.
8 Indemnification.
8.1 Survival of Representations and Warranties. The representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and shall continue forever thereafter.
8.2 Indemnification for the Benefit of the Company. Sieger acknowledges
that he understands the meaning and legal consequences of the representations
and warranties contained in Section 7 hereof, and agrees to indemnify and hold
harmless the Company and each of the Company's officers, directors, employees
and agents of from and against any and all loss, damage or liability due to or
arising out of a breach of any such representation or warranty.
4
<PAGE>
8.3 Indemnification for the Benefit of Sieger. The Company acknowledges
that it understands the meaning and legal consequences of the representations
and warranties contained in Section 6 hereof, and agrees to indemnify and hold
harmless Sieger from and against any and all loss, damage or liability due to or
arising out of a breach of any such representation or warranty.
9 Company's Right of First Purchase.
9.1 Company's Right of First Purchase. For such time until the IPO Closing,
any shares of Common Stock held by Sieger (including, but not limited to, the
New Shares) will be subject to the Company's right of first purchase. By virtue
of that right, (a) such shares of Common Stock may not be transferred during
Sieger's lifetime to any person other than members of Sieger's Immediate Family
(as defined below), a partnership whose members are Sieger's and/or members of
Sieger's Immediate Family, or a trust for the benefit of Sieger and/or members
of Sieger's Immediate Family, unless such transfer occurs within the 30 days
immediately following either (i) the expiration of 30 days following written
notice by Sieger to the Company identifying the prospective transferee and
offering the Company the first opportunity to purchase such stock at its Fair
Market Value (as defined below) in cash; or (ii) the Company's election to not
purchase such shares of Common Stock after receipt of such notice; and (b) upon
Sieger's death, the Company will have the right to purchase all or some of such
stock at its Fair Market Value within nine months after the date of death. This
right of first purchase will continue to apply to any such shares of Common
Stock after the transfer during Sieger's lifetime of such shares of Common Stock
to a member of Sieger's Immediate Family or to a family partnership or trust as
aforesaid, and after any transfer of such shares of Common Stock with respect to
which the Company expressly waived its right of first purchase without also
waiving it as to any subsequent transfers thereof, but it will not apply after a
transfer of such shares of Common Stock with respect to which the Company was
offered but did not exercise or waive its right of first purchase or more than
nine months after Sieger's death. The Company may assign all or any portion of
its right of first purchase to any one or more of its stockholders, or to a
pension or retirement plan or trust for employees of the Company, who may then
exercise the right so assigned. The Company's right of first purchase shall
terminate upon the IPO Closing.
9.2 Certain Definitions. In addition to the terms defined elsewhere in this
Agreement, the following terms will have the following definitions:
9.2.1 Fair Market Value. The "Fair Market Value" of Common Stock will
mean the price at which one could reasonably expect such stock to be sold in an
arm's length transaction, for cash, other than on an installment basis, to a
person not employed by, controlled by, in control of or under common control
with the issuer of such stock. Such Fair Market Value will be that which has
currently or most recently been determined for this purpose by the Board of
Directors of the Company, or at the sole discretion of the Board by an
independent appraiser or appraisers selected by the Board, in either case giving
due consideration to recent transactions involving shares of such stock, if any,
the issuer's net worth, prospective earning power and dividend-paying capacity,
the goodwill of the issuer's business, the issuer's industry position and its
management, that industry's economic outlook, the values of securities of
issuers whose stock is publicly traded and which are engaged in similar
businesses, the effect of transfer restrictions to which such stock may be
subject under law and under the applicable terms of any contract governing such
stock, the absence of a public market for such stock and such other matters as
the Board or its appraiser or appraisers deem pertinent. The determination by
the Board or its appraiser or appraisers of the Fair Market Value will be
conclusive and binding notwithstanding the possibility that other persons might
make a different determination. If the Fair Market Value to be used was thus
fixed more than sixteen months prior to the day as of which Fair Market Value is
being determined, it will in any event be no less than the book value of the
stock being valued at the end of the most recent period for which financial
statements of the Company are available.
5
<PAGE>
9.2.2 Immediate Family. An individual's "Immediate Family" includes
only his or her spouse, parents or other ancestors, and children and other
direct descendants of that individual or of his or her spouse (including such
ancestors and descendants by adoption).
10 Miscellaneous.
10.1 Confidentiality. Sieger hereby acknowledges and agrees that this
Agreement is confidential, and that its terms and contents shall not be
disclosed to any person other than through a press release of the Company.
10.2 Payment of Expenses. Except as expressly otherwise provided, each of
the Parties hereto shall pay all expenses and disbursements incurred by its
officers, employees, attorneys, accountants, financial advisers and other agents
and representatives in connection with this Agreement and the performance of its
obligations hereunder.
10.3 Notices. Any notices required or permitted to be given to, or served
upon, either Party hereto pursuant to this Agreement shall be sufficiently given
or served if sent to such Party by registered or certified mail, addressed to it
at its address, as set forth below, or to such other address as it shall
designate by written notice to the other parties addressed as follows:
VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
Att: William Wheaton III, President and CEO
Chaim Sieger
27-37 27th Street
Astoria, New York 11102
10.4 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
10.5 Entire Agreement. This agreement constitutes the entire agreement
between the Parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the Parties hereto with respect to
the subject matter hereof.
10.6 Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the Party against
whom enforcement of any such modification or agreement is sought. Either Party
hereto may, by an instrument in writing, waive compliance by the other Party
with any term or provision of this Agreement to be performed or complied with by
such other Party hereto. The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any subsequent
breach.
10.7 Assignment. This Agreement is personal in nature and neither of the
Parties shall, without the written consent of the other, assign or transfer his
or its rights or obligations hereunder to another person or entity, except as
herein expressly provided or permitted and except that the Company may transfer
all or any portion of its rights or obligations hereunder to any of its
affiliates without such prior written consent. Subject to the foregoing
provisions of this Section 10.7, this Agreement shall be binding upon and inure
to the benefit of the Parties hereto and their respective successors and
assigns.
10.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York and all disputes arising hereunder shall be
adjudicated solely before the courts of New York to whose jurisdiction the
Parties hereto consent.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement
and caused the same to be delivered on their behalf as of the date first above
written.
Chaim Sieger VCS Technologies, Inc.
/s/ Chaim Sieger By: /s/ William Wheaton
- ---------------- -------------------
Chaim Sieger William Wheaton, President and CEO
7
<PAGE>
Investment Restructuring Agreement (the "Agreement") effective as of March
1, 1998 by and between VCS Technologies, Inc. (the "Company"), and Apex
Communications, Inc. ("Apex"). The Company and Apex may be referred to herein
collectively as the "Parties" or individually as a "Party."
WHEREAS the Parties have agreed to restructure Apex's investment in the
Company consisting of loans made by Apex to the Company during 1997 and warrants
issued by the Company to Apex in consideration therefor,
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, the Parties hereby agree as follows:
1 Acknowledgments. The Parties acknowledge that Apex has made demand loans to
the Company during 1997 in the aggregate principal amount of $100,000, and that,
as a result of payments on principal made by the Company in the aggregate amount
of $7,026, such aggregate principal amount has been reduced to $92,974 (the
"Indebtedness"). The Parties further acknowledge that in consideration for the
aforesaid loans the Company has issued to Apex warrants to purchase 10,000
shares of the Company's common stock (the "Common Stock"), exercisable at an
exercise price of $3.00 per share (the "Existing Warrants").
2 Restructuring of Apex's Investment in the Company. Apex hereby agrees as
follows:
2.1 Conversion of the Indebtedness into Term Note. Effective as of the date
hereof, the Company's obligation to pay the Indebtedness to Apex is converted
into and made subject to the terms of a term note in the principal amount of
$92,974 (the "Term Note"). Simple interest shall accrue on the unpaid principal
amount of the Term Note at the rate of 14% per annum (computed on the basis of a
360-day year of twelve 30-day months). The entire principal amount and accrued
interest of the Term Note shall be paid to Apex on March 1, 2000.
2.2 Payment of Accrued Interest. All unpaid interest accrued on the
Indebtedness as of the date hereof shall be paid to Apex on March 1, 2000.
2.3 Cancellation of the Existing Warrants. The Existing Warrants are hereby
canceled, null and void, and of no further effect.
3 Consideration. In consideration for the restructuring of Apex's investment in
the Company as provided in Section 2 above, the Company hereby agrees to issue
to Apex warrants to purchase an aggregate of 50,000 shares of Common Stock (the
"New Warrants"), such warrants exercisable at an exercise price of $2.00 per
share during the period beginning on the date hereof and ending on the sooner to
occur of (i) March 1, 2001 or (ii) the date prior to the effective date of the
registration statement filed in connection with the Company's initial public
offering.
4 Representations and Warranties of the Company. The Company represents and
warrants to Apex as follows:
4.1 The Company is duly organized, validly existing and in good standing
under the laws of the state of Delaware with full power and authority to operate
its business as currently conducted.
4.2 The authorized capital stock of the Company consists of 9,990,000
shares of Common Stock and 10,000 shares of Preferred Stock. Each outstanding
share of Common Stock is duly authorized, validly issued, fully paid and
non-assessable, and has not been issued and is not owned or held in violation of
any preemptive rights of stockholders. No shares of Preferred Stock are
currently outstanding.
4.3 The Company has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. This Agreement has been duly
authorized by the Company and, when executed and delivered by the Company will
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
4.4 No consent, authorization, approval, order, license, certificate or
permit of or from, or declaration or filing with, any federal, state, local or
other governmental authority, or any court or any
<PAGE>
other tribunal, is required by the Company for the execution, delivery or
performance by the Company under this Agreement (except for such filings as may
be required under federal and state securities laws).
5 Representations and Warranties of Apex. Apex hereby represents and warrants
to the Company as follows:
5.1 Apex has all requisite power and authority to execute, deliver and
perform its obligations under this Agreement. This Agreement has been duly
authorized by Apex and, when executed and delivered by Apex will constitute the
legal, valid and binding obligation of Apex, enforceable against Apex in
accordance with its terms. No consent, authorization, approval, order, license,
certificate or permit of or from, or declaration or filing with, any federal,
state, local or other governmental authority, or any court or any other
tribunal, is required by Apex for the execution, delivery or performance by Apex
under this Agreement.
5.2 Apex has received, read carefully and is familiar with this Agreement.
Respecting the Company, Apex is familiar with the Company's business and
financial condition and any other matters relating to the transactions
contemplated hereby; Apex has received all materials which have been requested
by it, has had a reasonable opportunity to ask questions of the Company and its
representatives, and the Company has answered all inquiries that Apex has put to
it. Apex has taken all the steps necessary to evaluate the merits and risks of
the refinancing transactions contemplated hereby.
5.3 Apex has been advised by the Company to consider retaining legal
counsel in connection with the preparation and the execution of this Agreement.
5.4 Apex represents that it is an "accredited investor" as such term is
defined in Rule 501 of the Rules and Regulations promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
5.5 Apex has such knowledge and experience in finance, securities,
investments and other business matters so as to be able to evaluate the merits
and risks of its investment in the Company.
5.6 Apex has adequate means of providing for its current and foreseeable
future needs and has no need for liquidity of its investment in the Company.
Apex recognizes and is fully cognizant of the fact that its investment in the
Company involves a high degree of risk, and Apex represents that it can afford
to bear such risk, including, without limitation, the risk of losing the entire
investment.
5.7 Apex has been advised by the Company that (i) none of the New Warrants,
the shares of Common Stock underlying the New Warrants (the "Underlying Shares")
or the Term Note has been registered under the Securities Act, and that the New
Warrants, the Underlying Shares and the Term Note will be issued on the basis of
the statutory exemption provided by Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or both, relating to transactions by an
issuer not involving any public offering, and under similar exemptions under
applicable state securities laws; (ii) none of the New Warrants, the Underlying
Shares or the Term Note has been registered or qualified with any federal or
state agency or self-regulatory organization, and (iii) the Company's reliance
on exemptions from federal and state registration or qualification requirements
is based in part upon the representations made by Apex contained in this
Agreement.
5.8 Apex has been advised by the Company of, and/or it is otherwise
familiar with, the nature of the limitations on the transfer of the New
Warrants, the Underlying Shares and the Term Note imposed by the Securities Act
and the rules and regulations promulgated thereunder. In particular, Apex agrees
that no sale, assignment or transfer of any of the New Warrants, the Underlying
Shares or the Term Note shall be valid or effective (and agrees to not so sell,
assign or transfer any of the New Warrants, the Underlying Shares or the Term
Note), and the Company shall not be required to give any effect to such a sale,
assignment or transfer, unless the sale, assignment or transfer is (i)
registered under the
2
<PAGE>
Securities Act, it being understood that none of the New Warrants, the
Underlying Shares or the Term Note are currently registered for sale; or (ii)
made in accordance with all the requirements and limitations of Rule 144 under
the Securities Act. Apex acknowledges that the New Warrants, the Underlying
Shares and the Term Note shall be subject to a stop transfer order and that the
certificate or certificates evidencing the New Warrants, the Underlying Shares
and the Term Note shall bear the following legend (and such other legends as may
be required by state blue sky laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (1) A REGISTRATION
STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH
RESPECT TO THESE SECURITIES, OR (2) PURSUANT TO A SPECIFIC EXEMPTION
FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST
HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS
WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW.
5.9 Apex is acquiring the New Warrants, the Underlying Shares and the Term
Note for its own account for investment and not with a view to the sale or
distribution thereof or the granting of any participation therein. Apex has no
present intention of distributing or selling to others any of such interest or
granting any participation therein.
5.10 It never has been represented, guaranteed or warranted by any of the
Company, the Company's officers, directors, stockholders, employees or agents,
or any other person, whether expressly or by implication, that (i) the Company
or Apex will realize any given percentage of profits and/or amount or type of
consideration, profit or loss as a result of the Company's activities or Apex's
investment; or (ii) the past performance or experience of the management of the
Company, or of any other person, will in any way indicate the predictable
results of the Company's activities or the ownership of the New Warrants, the
Underlying Shares or the Term Note.
5.11 Apex is not acquiring the New Warrants, the Underlying Shares or the
Term Note as a result of or subsequent to any advertisement, article, notice or
other communication published in any newspaper, magazine or similar media or
broadcast over television or radio, or presented at any seminar or meeting, or
any solicitation of a share exchange by a person other than a representative of
the Company with whom Apex had a pre-existing relationship.
5.12 Apex is not relying on the Company with respect to the tax and other
economic considerations of an investment.
6 Indemnification.
6.1 Survival of Representations and Warranties. The representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and shall continue forever thereafter.
6.2 Indemnification for the Benefit of the Company. Apex acknowledges that
it understands the meaning and legal consequences of the representations and
warranties contained in Section 5 hereof, and agrees to indemnify and hold
harmless the Company and each of the Company's officers, directors, employees
and agents from and against any and all loss, damage or liability due to or
arising out of a breach of any such representation or warranty.
6.3 Indemnification for the Benefit of Apex. The Company acknowledges that
it understands the meaning and legal consequences of the representations and
warranties contained in Section 4 hereof, and agrees to indemnify and hold
harmless Apex and each of the Apex's officers, directors, employees and agents
from and against any and all loss, damage or liability due to or arising out of
a breach of any such representation or warranty.
3
<PAGE>
7 Company's Right of First Purchase.
7.1 Company's Right of First Purchase. For such time until the date prior
to the effective date of the registration statement filed in connection with the
Company's initial public offering, any shares of Common Stock held by Apex will
be subject to the Company's right of first purchase. By virtue of that right,
such shares of Common Stock may not be transferred to any person or entity
unless such transfer occurs within the 30 days immediately following either (i)
the expiration of 30 days following written notice by Apex to the Company
identifying the prospective transferee and offering the Company the first
opportunity to purchase such stock at its Fair Market Value (as defined below)
in cash; or (ii) the Company's election to not purchase such shares of Common
Stock after receipt of such notice. This right of first purchase shall terminate
with respect to any shares of Common Stock with respect to which the Company was
offered but did not exercise its right of first purchase. The Company may assign
all or any portion of its right of first purchase to any one or more of its
stockholders, or to a pension or retirement plan or trust for employees of the
Company, who may then exercise the right so assigned. The Company's right of
first purchase shall terminate on the date prior to the effective date of the
registration statement filed in connection with the Company's initial public
offering.
7.2 Definition of Fair Market Value. The "Fair Market Value" of Common
Stock will mean the price at which one could reasonably expect such stock to be
sold in an arm's length transaction, for cash, other than on an installment
basis, to a person not employed by, controlled by, in control of or under common
control with the issuer of such stock. Such Fair Market Value will be that which
has currently or most recently been determined for this purpose by the Board of
Directors of the Company, or at the sole discretion of the Board by an
independent appraiser or appraisers selected by the Board, in either case giving
due consideration to recent transactions involving shares of such stock, if any,
the issuer's net worth, prospective earning power and dividend-paying capacity,
the goodwill of the issuer's business, the issuer's industry position and its
management, that industry's economic outlook, the values of securities of
issuers whose stock is publicly traded and which are engaged in similar
businesses, the effect of transfer restrictions to which such stock may be
subject under law and under the applicable terms of any contract governing such
stock, the absence of a public market for such stock and such other matters as
the Board or its appraiser or appraisers deem pertinent. The determination by
the Board or its appraiser or appraisers of the Fair Market Value will be
conclusive and binding notwithstanding the possibility that other persons might
make a different determination. If the Fair Market Value to be used was thus
fixed more than sixteen months prior to the day as of which Fair Market Value is
being determined, it will in any event be no less than the book value of the
stock being valued at the end of the most recent period for which financial
statements of the Company are available.
8 Miscellaneous.
8.1 Confidentiality. Apex hereby acknowledges and agrees that this
Agreement is confidential, and that its terms and contents shall not be
disclosed to any person other than through a press release of the Company.
8.2 Payment of Expenses. Except as expressly otherwise provided, each of
the Parties hereto shall pay all expenses and disbursements incurred by its
officers, employees, attorneys, accountants, financial advisers and other agents
and representatives in connection with this Agreement and the performance of its
obligations hereunder.
8.3 Notices. Any notices required or permitted to be given to, or served
upon, either Party hereto pursuant to this Agreement shall be sufficiently given
or served if sent to such Party by registered or certified mail, addressed to it
at its address, as set forth below, or to such other address as it shall
designate by written notice to the other parties addressed as follows:
VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
Att: William Wheaton III, President and CEO
4
<PAGE>
Apex Communications, Inc.
-------------------------
-------------------------
8.4 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
8.5 Entire Agreement. This agreement constitutes the entire agreement
between the Parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the Parties hereto with respect to
the subject matter hereof.
8.6 Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the Party against
whom enforcement of any such modification or agreement is sought. Either Party
hereto may, by an instrument in writing, waive compliance by the other Party
with any term or provision of this Agreement to be performed or complied with by
such other Party hereto. The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any subsequent
breach.
8.7 Assignment. This Agreement is personal in nature and neither of the
Parties shall, without the written consent of the other, assign or transfer its
rights or obligations hereunder to another person or entity, except as herein
expressly provided or permitted and except that the Company may transfer all or
any portion of its rights or obligations hereunder to any of its affiliates
without such prior written consent. Subject to the foregoing provisions of this
Section 8.7, this Agreement shall be binding upon and inure to the benefit of
the Parties hereto and their respective successors and assigns.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York and all disputes arising hereunder shall be
adjudicated solely before the courts of New York to whose jurisdiction the
Parties hereto consent.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement and
caused the same to be delivered on their behalf as of the date first above
written.
Apex Communications, Inc. VCS Technologies, Inc.
By: /s/ Scott Wheaton By: /s/ William Wheaton
------------------------ ----------------------------------
Scott Wheaton, President William Wheaton, President and CEO
5
<PAGE>
Investment Restructuring and Preferred Stock Purchase Agreement (the
"Agreement") effective as of August 31, 1998 by and between VCS Technologies,
Inc. (the "Company"), and Apex Communications, Inc. ("Apex"). The Company and
Apex may be referred to herein collectively as the "Parties" or individually as
a "Party."
WHEREAS the Parties have agreed to restructure Apex's existing investment
in the Company for the purpose of facilitating a possible initial public
offering of securities (the "IPO") currently proposed to be conducted by the
Company during 1998,
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, the Parties hereby agree as follows:
1 Acknowledgments. The Parties acknowledge that the provisions of this Section 1
accurately and completely list and describe all of the Company's securities
owned by Apex (together with all of the additional rights and privileges
pertaining thereto) and all of the indebtedness owed to Apex by the Company. The
Parties further acknowledge that all references herein to the Company's common
stock (the "Common Stock") are effective as of the date of this Agreement. Upon
the effective date (if any) of an anticipated reverse stock split of the
outstanding Common Stock to be effected following the date of this Agreement,
all references to the Common Stock contained herein shall be deemed adjusted in
accordance with such reverse stock split.
1.1 Term Note. Apex holds a promissory note due March 1, 2000, in the
principal amount of $92,974, issued to Apex by the Company as of March 1, 1998
(the "Term Note").
1.2 Existing Warrants. Apex owns of record warrants (the "Existing
Warrants") to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price of $2.00 per share.
1.3 Interest Indebtedness. The Company is obligated to pay to Apex the
aggregate amount of $15,051, (the "Interest Indebtedness"), which amount is
comprised of (i) unpaid interest in the amount of $8,544 accrued on loans in the
principal amount of $100,000 made by Apex to the Company during 1997; and (ii)
unpaid interest in the amount of $6,507 accrued on the Term Note from March 1,
1998 through the date hereof. The Parties acknowledge that no interest has
accrued or will accrue on any portion of the Interest Indebtedness.
2 Restructuring of Apex's Investment and Purchase of Preferred Stock. Apex
hereby agrees as follows:
2.1 Purchase of Preferred Stock; Cancellation of the Term Note. Effective
as of the date hereof, Apex hereby agrees to purchase from the Company, and the
Company agrees to sell to Apex, 1,080 shares of the Company's Series A Preferred
Stock (the "Series A Shares") for an aggregate purchase price of $108,025. As
payment for the Series A Shares purchased hereby, Apex has waived payment of the
Interest Indebtedness and has surrendered the Term Note to the Company and the
Term Note is hereby canceled, null and void, and of no further effect. The
Company shall deliver to Apex a certificate representing the Series A Shares as
soon as practicable following the date of this Agreement.
2.2 Cancellation of the Existing Warrants. The Existing Warrants are hereby
canceled, null and void, and of no further effect.
3 Consideration. In consideration for the restructuring of Apex's investment in
the Company and the purchase of the Series A Shares as provided in Section 2
above, the Company hereby agrees to issue to Apex warrants to purchase an
aggregate of 50,000 shares of Common Stock (the "New Warrants"), such warrants
exercisable at an exercise price of $0.10 per share during the period beginning
on the date hereof and ending on March 1, 2003.
4 Representations and Warranties of the Company. The Company represents and
warrants to Apex as follows:
<PAGE>
4.1 The Company is duly organized, validly existing and in good standing
under the laws of the state of Delaware with full power and authority to operate
its business as currently conducted.
4.2 The authorized capital stock of the Company consists of 9,990,000
shares of Common Stock and 10,000 shares of Preferred Stock. Each outstanding
share of Common Stock is duly authorized, validly issued, fully paid and
non-assessable, and has not been issued and is not owned or held in violation of
any preemptive rights of stockholders. No shares of Preferred Stock are
currently outstanding. As soon as practicable following the date of this
Agreement, the Company shall take such corporate actions and shall make such
filings with the Secretary of State of the State of Delaware as may be necessary
to authorize, designate and issue the Series A Shares in accordance with this
Agreement.
4.3 The Company has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. This Agreement has been duly
authorized by the Company and, when executed and delivered by the Company will
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
4.4 Except as set forth in Section 4.2 above, no consent, authorization,
approval, order, license, certificate or permit of or from, or declaration or
filing with, any federal, state, local or other governmental authority, or any
court or any other tribunal, is required by the Company for the execution,
delivery or performance by the Company under this Agreement (except for such
filings as may be required under federal and state securities laws).
5 Representations and Warranties of Apex. Apex hereby represents and warrants
to the Company as follows:
5.1 Apex has all requisite power and authority to execute, deliver and
perform its obligations under this Agreement. This Agreement has been duly
authorized by Apex and, when executed and delivered by Apex will constitute the
legal, valid and binding obligation of Apex, enforceable against Apex in
accordance with its terms. No consent, authorization, approval, order, license,
certificate or permit of or from, or declaration or filing with, any federal,
state, local or other governmental authority, or any court or any other
tribunal, is required by Apex for the execution, delivery or performance by Apex
under this Agreement.
5.2 Apex has received, read carefully and is familiar with this Agreement.
Respecting the Company, Apex is familiar with the Company's business and
financial condition and any other matters relating to the transactions
contemplated hereby; Apex has received all materials which have been requested
by it, has had a reasonable opportunity to ask questions of the Company and its
representatives, and the Company has answered all inquiries that Apex has put to
it. Apex has taken all the steps necessary to evaluate the merits and risks of
the refinancing transactions contemplated hereby.
5.3 Apex has been advised by the Company to consider retaining legal
counsel in connection with the preparation and the execution of this Agreement.
5.4 Apex represents that it is an "accredited investor" as such term is
defined in Rule 501 of the Rules and Regulations promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
5.5 Apex has such knowledge and experience in finance, securities,
investments and other business matters so as to be able to evaluate the merits
and risks of its investment in the Company.
5.6 Apex has adequate means of providing for its current and foreseeable
future needs and has no need for liquidity of its investment in the Company.
Apex recognizes and is fully cognizant of the fact that its investment in the
Company involves a high degree of risk, and Apex represents that it can afford
to bear such risk, including, without limitation, the risk of losing the entire
investment.
2
<PAGE>
5.7 Apex has been advised by the Company that (i) none of the Series A
Shares, the New Warrants or the shares of Common Stock underlying the New
Warrants (the "Underlying Shares") has been registered under the Securities Act,
and that the Series A Shares, the New Warrants and the Underlying Shares will be
issued on the basis of the statutory exemption provided by Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, or both, relating to
transactions by an issuer not involving any public offering, and under similar
exemptions under applicable state securities laws; (ii) none of the Series A
Shares, the New Warrants or the Underlying Shares has been registered or
qualified with any federal or state agency or self-regulatory organization, and
(iii) the Company's reliance on exemptions from federal and state registration
or qualification requirements is based in part upon the representations made by
Apex contained in this Agreement.
5.8 Apex has been advised by the Company of, and/or it is otherwise
familiar with, the nature of the limitations on the transfer of the Series A
Shares, the New Warrants and the Underlying Shares imposed by the Securities Act
and the rules and regulations promulgated thereunder. In particular, Apex agrees
that no sale, assignment or transfer of any of the Series A Shares, the New
Warrants or the Underlying Shares shall be valid or effective (and agrees to not
so sell, assign or transfer any of the Series A Shares, the New Warrants or the
Underlying Shares), and the Company shall not be required to give any effect to
such a sale, assignment or transfer, unless the sale, assignment or transfer is
(i) registered under the Securities Act, it being understood that none of the
Series A Shares, the New Warrants or the Underlying Shares is currently
registered for sale; or (ii) made in accordance with all the requirements and
limitations of Rule 144 under the Securities Act. Apex acknowledges that the
Series A Shares, the New Warrants and the Underlying Shares shall be subject to
a stop transfer order and that the certificate or certificates evidencing the
Series A Shares, the New Warrants and the Underlying Shares shall bear the
following legend (and such other legends as may be required by state blue sky
laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (1) A REGISTRATION
STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH
RESPECT TO THESE SECURITIES, OR (2) PURSUANT TO A SPECIFIC EXEMPTION
FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST
HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS
WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW.
5.9 Apex is acquiring the Series A Shares, the New Warrants and the
Underlying Shares for its own account for investment and not with a view to the
sale or distribution thereof or the granting of any participation therein. Apex
has no present intention of distributing or selling to others any of such
interest or granting any participation therein.
5.10 It never has been represented, guaranteed or warranted by any of the
Company, the Company's officers, directors, stockholders, employees or agents,
or any other person, whether expressly or by implication, that (i) the Company
or Apex will realize any given percentage of profits and/or amount or type of
consideration, profit or loss as a result of the Company's activities or Apex's
investment; or (ii) the past performance or experience of the management of the
Company, or of any other person, will in any way indicate the predictable
results of the Company's activities or the ownership of the Series A Shares, the
New Warrants or the Underlying Shares.
5.11 Apex is not acquiring the Series A Shares, the New Warrants or the
Underlying Shares as a result of or subsequent to any advertisement, article,
notice or other communication published in any newspaper, magazine or similar
media or broadcast over television or radio, or presented at any
3
<PAGE>
seminar or meeting, or any solicitation of a share exchange by a person other
than a representative of the Company with whom Apex had a pre-existing
relationship.
5.12 Apex is not relying on the Company with respect to the tax and other
economic considerations of an investment.
6 Indemnification.
6.1 Survival of Representations and Warranties. The representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and shall continue forever thereafter.
6.2 Indemnification for the Benefit of the Company. Apex acknowledges that
it understands the meaning and legal consequences of the representations and
warranties contained in Section 5 hereof, and agrees to indemnify and hold
harmless the Company and each of the Company's officers, directors, employees
and agents from and against any and all loss, damage or liability due to or
arising out of a breach of any such representation or warranty.
6.3 Indemnification for the Benefit of Apex. The Company acknowledges that
it understands the meaning and legal consequences of the representations and
warranties contained in Section 4 hereof, and agrees to indemnify and hold
harmless Apex and each of Apex's officers, directors, employees and agents from
and against any and all loss, damage or liability due to or arising out of a
breach of any such representation or warranty.
7 Company's Right of First Purchase.
7.1 Company's Right of First Purchase. For such time until the date prior
to the effective date of the registration statement filed in connection with the
Company's initial public offering, any shares of Common Stock held by Apex will
be subject to the Company's right of first purchase. By virtue of that right,
such shares of Common Stock may not be transferred to any person or entity
unless such transfer occurs within the 30 days immediately following either (i)
the expiration of 30 days following written notice by Apex to the Company
identifying the prospective transferee and offering the Company the first
opportunity to purchase such stock at its Fair Market Value (as defined below)
in cash; or (ii) the Company's election to not purchase such shares of Common
Stock after receipt of such notice. This right of first purchase shall terminate
with respect to any shares of Common Stock with respect to which the Company was
offered but did not exercise its right of first purchase. The Company may assign
all or any portion of its right of first purchase to any one or more of its
stockholders, or to a pension or retirement plan or trust for employees of the
Company, who may then exercise the right so assigned. The Company's right of
first purchase shall terminate on the date prior to the effective date of the
registration statement filed in connection with the Company's initial public
offering.
7.2 Definition of Fair Market Value. The "Fair Market Value" of Common
Stock will mean the price at which one could reasonably expect such stock to be
sold in an arm's length transaction, for cash, other than on an installment
basis, to a person not employed by, controlled by, in control of or under common
control with the issuer of such stock. Such Fair Market Value will be that which
has currently or most recently been determined for this purpose by the Board of
Directors of the Company, or at the sole discretion of the Board by an
independent appraiser or appraisers selected by the Board, in either case giving
due consideration to recent transactions involving shares of such stock, if any,
the issuer's net worth, prospective earning power and dividend-paying capacity,
the goodwill of the issuer's business, the issuer's industry position and its
management, that industry's economic outlook, the values of securities of
issuers whose stock is publicly traded and which are engaged in similar
businesses, the effect of transfer restrictions to which such stock may be
subject under law and under the applicable terms of any contract governing such
stock, the absence of a public market for such stock and such other matters as
the Board or its appraiser or appraisers deem pertinent. The determination by
the Board or its appraiser or appraisers of the Fair Market Value will be
conclusive and binding notwithstanding the possibility that other persons might
make a different determination. If the Fair Market Value to be used was thus
fixed more than sixteen months prior to the day as of which
4
<PAGE>
Fair Market Value is being determined, it will in any event be no less than the
book value of the stock being valued at the end of the most recent period for
which financial statements of the Company are available.
8 Miscellaneous.
8.1 Confidentiality. Apex hereby acknowledges and agrees that this
Agreement is confidential, and that its terms and contents shall not be
disclosed to any person other than through a press release of the Company.
8.2 Payment of Expenses. Except as expressly otherwise provided, each of
the Parties hereto shall pay all expenses and disbursements incurred by its
officers, employees, attorneys, accountants, financial advisers and other agents
and representatives in connection with this Agreement and the performance of its
obligations hereunder.
8.3 Notices. Any notices required or permitted to be given to, or served
upon, either Party hereto pursuant to this Agreement shall be sufficiently given
or served if sent to such Party by registered or certified mail, addressed to it
at its address, as set forth below, or to such other address as it shall
designate by written notice to the other parties addressed as follows:
VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
Att: William Wheaton III, President and CEO
Apex Communications, Inc.
-------------------------
-------------------------
8.4 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
8.5 Entire Agreement. This agreement constitutes the entire agreement
between the Parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the Parties hereto with respect to
the subject matter hereof.
8.6 Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the Party against
whom enforcement of any such modification or agreement is sought. Either Party
hereto may, by an instrument in writing, waive compliance by the other Party
with any term or provision of this Agreement to be performed or complied with by
such other Party hereto. The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any subsequent
breach.
8.7 Assignment. This Agreement is personal in nature and neither of the
Parties shall, without the written consent of the other, assign or transfer its
rights or obligations hereunder to another person or entity, except as herein
expressly provided or permitted and except that the Company may transfer all or
any portion of its rights or obligations hereunder to any of its affiliates
without such prior written consent. Subject to the foregoing provisions of this
Section 8.7, this Agreement shall be binding upon and inure to the benefit of
the Parties hereto and their respective successors and assigns.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York and all disputes arising hereunder shall be
adjudicated solely before the courts of New York to whose jurisdiction the
Parties hereto consent.
5
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement and
caused the same to be delivered on their behalf as of the date first above
written.
Apex Communications, Inc. VCS Technologies, Inc.
By: /s/ Scott Wheaton By: /s/ William Wheaton
-------------------------- ----------------------------------
Scott Wheaton, President William Wheaton, President and CEO
6
<PAGE>
SUMMARY SHEET
LANDLORD: 456 GLENBROOK ROAD ASSOCIATES, a partnership
organized and existing under the laws of the State
of Connecticut.
ADDRESS One Barry Place
FOR NOTICE: Stamford, Connecticut 06902
TENANT: VC SOLUTIONS INC., a Delaware Corporation
Authorized to do business in Connecticut
ADDRESS 456 Glenbrook Road
FOR NOTICE: Stamford, Connecticut 06902
PREMISES: The area known as Space No. I on the Second Floor
of the premises known as 456 Glenbrook Road,
Stamford, Connecticut, as more particularly shown
in the sketch annexed hereto as Exhibit A.
RENTAL: Base Annual Rental of $31,200, payable at the rate
of $2,600 per month, with the payment for September
1996 in the amount of $2,600 to be paid upon the
execution of the lease, and thereafter equal
consecutive monthly payments of $2,600 each,
commencing on October 1996.
TERM: 1 Year - commencing Sept 9, 1996 and ending Aug.
31, 1997.
PURPOSE: Office Use.
SECURITY: $5,200.00
PARKING: Five (5) automobiles.
ADMINISTRATIVE No more than $15 per day and no more than $175
CHARGE: for any one month.
BROKER: Mark Beaudry of Mont Enterprises.
TAXES: Semi-annual tax base of $14,601.96 ($29,203.20 for
full year).
PROPORTIONATE
SHARE: 17.4%
ELECTRICITY: Tenant pays.
OPTION: 1 Year at Cost of Living Increase, see Rider A.
<PAGE>
THIS INDENTURE, made by and between the party designated as Landlord in
the Summary Sheet attached hereto and made a part hereof hereinafter called the
Landlord, which expression shall include its successors and assigns where the
context so requires or admits and the party designated as Tenant in the Summary
Sheet attached hereto and made a part hereof hereinafter called the Tenant,
which expression shall include its successors and assigns where the context so
requires or admits.
W I T N E S S E T H:
The parties hereto covenant and agree as follows:
1. The said Landlord has leased and does hereby lease to said Tenant,
the premises designated as "the Premises" in the Summary Sheet attached hereto
and made a part hereof, subject to the collection of funds provided far herein.
In the event the Tenant is a corporation then the individual signing on behalf
of said corporation represents that he is authorized to act in behalf of said
corporation.
2. Said lease shall be for the term designated as such in the Summary
Sheet attached hereto and made a part hereof for the Base Annual Rental set
forth in said Summary Sheet payable in twelve (12) consecutive equal monthly
payments as set forth in said Summary Sheet without set-off, each, to wit, on
the first day of each and every month of each year during said term in advance,
at the premises of the Landlord, or at such other place as the Landlord may
direct.
3. The term "Summary Sheet" refers to the page designated as such and
attached hereto, which page is expressly made a part of the within Lease. The
terms "Landlord" and "Tenant" used herein shall include the plural thereof and
the necessary changes required to make the provisions hereof apply to
corporations or partnerships or other entities or man or woman shall be
construed as if made. The terms "Premises", "demised premises", and "leased
premises" as used herein shall be interchangeable. The terms Base Annual Rental
and Annual Base Rental as used herein shall be interchangeable.
4. The Tenant shall use the demised premises for the purposes
designated as "Purpose" in the Summary Sheet and for no other purposes. The
setting forth of the purpose shall not be construed as a representation by the
Landlord that the Premises may be used for the purpose specified nor that the
other uses in the building of which the Premises is a part are compatible with
said use.
The Tenant acknowledges that the remainder of the building of which the
Premises is a part, may be used for all other purposes consistent with zoning.
5. The Tenant has this day deposited with the Landlord the sum set
forth as Security in the Summary Sheet to secure the faithful performance of all
of the terms and provisions of this lease. Said sum shall be returned without
interest to the Tenant after the termination of the within lease, provided the
Tenant has performed all of the terms of the lease on its part to be performed.
In the event the Base Annual Rent is increased at any time during the term of
this Lease, then the security provided for herein shall be increased in the same
proportion as the Base Annual Rental has been increased. Said increase shall be
paid with the first monthly installment of the increased Base Annual Rental and
failure to pay same shall be
<PAGE>
treated as a default in the payment of rent.
6. The Landlord covenants with the Tenant that Landlord has good right
to lease the Premises in manner aforesaid, and that it will permit Tenant,
tenant keeping all the covenants on its part as hereinafter contained to
peacefully and quietly enjoy and hold the Premises during said term.
7. The Tenant shall have the right to park in the common parking area
that number of automobiles or in the area set forth in the Summary Sheet. It is
understood that the Landlord shall have the right to alter said parking and
modify the parking area (including specific designations) as long as Tenant's
parking is within a reasonable distance from the Premises. No motor vehicle
shall be parked for more than 48 consecutive hours and any parked vehicles must
be in operable condition excluding temporary breakdown for reasonable periods of
time. An administrative fee of $20.00 per day will be payable as additional rent
for each day that any tenant is in violation of the provision in previous
sentence. Sais aid sum shall be paid within ten (10) days after receipt of
billing.
8. If the said Tenant shall fail to pay the rent as aforesaid, within
ten (10) days after it shall become due and payable, with or without demand for
the same, or if the said Tenant shall assign this lease or underlet except as
provided for herein, or otherwise dispose of the whole or any part of the
Premises except as provided for herein or use the same for any purpose but that
herein authorized, or fail to perform any of the promises or agreements on its
part to be done and performed, as herein set forth, and shall not cure any of
the aforesaid breaches (exclusive of a breach of the rent obligation) after
twenty (20) days written notice, then this lease shall, at the option of the
Landlord, thereupon terminate and expire, and it shall be lawful for the
Landlord, at any time thereafter, without demand or notice, to have and
repossess its former estate unless cured as aforesaid. In the event any cure
other than non-payment of rent or additional rent shall reasonably require more
than 20 days, than the Tenant shall have such additional time as is reasonably
required provided the Tenant commences said cure within said 20 day period and
diligently pursues said cure. And it is further agreed between the parties
hereto, that whenever this lease shall terminate either by lapse of time, or by
virtue of any of the express stipulations therein, the Tenant hereby waives all
rights to any notice to quit possession as prescribed by the statute relating to
Summary Process. No demand for rent for condition broken, as at common law,
shall be necessary, to enable the Landlord to recover such possession pursuant
to the statute relating to Summary Process.
9. The Tenant further agrees to comply with and conform to all the laws
and regulations of the State of Connecticut, the United States Government and
their instrumentalities, and the ordinances, rules and regulations of the city
where the Premises are located, and its duly authorized officers, relating to
environment, hazardous waste, pollutants, health, nuisance, fire, streets and
sidewalks, so far as the Premises are or may be concerned. Tenant shall not use
any local sewers or septic systems for the unlawful disposal of waste products
generated, originated, stored, or otherwise located upon the Premises, but shall
dispose of the same off Premises and in accordance with all governmental
regulations. Tenant shall not produce, generate, emit, store, bury, or dispose
of any hazardous or toxic materials substances, or wastes upon the Premises
except in compliance of all applicable law. Tenant shall indemnify and hold
harmless Landlord from all claims, damages, loss, liability, penalty, and
obligation actually incurred by the Landlord due to any breach of this article.
<PAGE>
10. Tenant shall make no claim upon Landlord for any damage or injury
caused to its property by any casualty; by the breaking of sewer, steam, water,
electricity or gas pipes; nor by reason of any act, default or neglect of any
other tenant in the same building, or of occupants of adjacent or contiguous
buildings. The Landlord shall not be liable for any damage to any property at
any time on the Premises, from steam, gas, or electricity, or from water, rain
or snow, which may leak into, issue or flow from any part of said building, or
from the pipes or plumbing works of same, nor for any damage caused by reason of
any matter or thing whatever. The Tenant will protect, indemnify and forever
save and keep harmless the Landlord from and against any loss, costs, damage and
expense by or arising out of any breach or default in the performance or
observance of any of the provisions, conditions or covenants of this indenture.
11. If at any time proceedings in bankruptcy shall be instituted by or
against the Tenant under the U.S. Bankruptcy Act, or make an assignment for the
benefit of his creditors, or if a receiver or trustee be appointed of the
property of the Tenant which is not vacated within 60 days, or if this (unless
Premises reverts to Tenant within 60 days of transfer) lease shall by operation
of law devolve upon or pass to anyone other than said Tenant personally, then to
the extent permitted by law, in each and any of said events, this lease shall
immediately end and terminate at the option of said Landlord. Upon such
termination all future installments of rent unpaid and all other sums due and
payable by the Tenant shall at once become due and payable at the option of the
Landlord.
In the event the Tenant, under a bankruptcy or like proceedings assigns
the within Lease for consideration to a third party, any value that the Tenant
debtor shall obtain shall inure to the benefit of the Landlord. In any event,
the Landlord shall have a right of first refusal in connection with any proposed
sale of Tenant's interest in this Lease which right must be exercised within
fifteen (15) days after notification by the Tenant or Tenant's trustee or
receiver or successor in interest of the terms of the proposed sale and
assignment of said lease.
12. The Tenant shall conduct his business in such a manner, both as
regards noise and other nuisances, including but not limited to odors, as will
not interfere with, annoy, or disturb any other tenant in the conduct of its
business, or the Landlord in the management of the building.
13. The specific remedies to which the Landlord or the Tenant may
resort under the terms of this lease are cumulative and are not intended to be
exclusive of any other remedies or means of redress to which they may be
lawfully entitled in case of any breach or threatened breach by either of them
or any provision of this lease. The failure of the Landlord or the Tenant to
insist in any one or more cases upon the strict performance of any of the terms,
covenants, and conditions of this lease, or to exercise any right or remedy
herein contained, shall not be construed as a waiver or relinquishment for the
future of such terms, covenants and conditions. The acceptance of rent by the
Landlord after a default, shall not be held to be a waiver of any default and
right to terminate this lease (except that tender of the full amount of rent due
and acceptance thereof shall be a waiver of default for non-payment of rent) and
any right to terminate for non-payment, and the Landlord may re-enter and take
possession the Premises the same as if no rent had been accepted after such
default.
14. In the event the Landlord shall bring any summary process action,
or any other
<PAGE>
action arising out of the Tenant's failure to perform any of the covenants and
agreements on its part and shall prevail, it shall be entitled to reasonable
attorney's fees in addition to taxable costs. Also, so long as the Tenant shall
he a Tenant hereunder, the amount of such expenses shall be deemed to be
additional rent hereunder and shall be due from the Tenant to the Landlord on
the first day of the month following the incurring of such expenses.
15. The Landlord shall at all times have the right to make such
reasonable rules and regulations as may be deemed proper or advisable for the
safety, care and cleanliness of the landlord's premises, of which the Premises
is a part, and for the preservation of good order therein, all of which rules
and regulations shall be uniformly applied by Landlord and shall be carried out
and observed by the Tenant.
16. In the event that the Tenant shall fail to pay the rent within
fifteen (15) days after becoming due, then the Tenant shall pay an
administrative charge and damages in an amount per day designated as such in the
Summary Sheet until said rent shall be paid. In no event shall the
administration charge exceed the amount designated as such in the Summary Sheet
for any one month. The clause will not alter the express stipulation that any
nonpayment may serve to expire and terminate the lease, as provided for herein,
and shall be in addition and not in lieu of any other damages provided by law.
Said sum shall be due and payable as additional rent within ten (10) days
after/billing by Landlord.
17. The Tenant takes the Premises "as is" subject to all zoning and
planning rules and regulations and any other municipal or state laws, rules and
regulations, except as specifically provided for herein. The Tenant represents
that it has made its own independent examination with respect to the dimensions
of the Premises and is satisfied with the same. If any square footage is set
forth in the Summary Sheet with respect to the Premises, it is understood that
the same was measured from the outside walls of the building to the midline of
the interior walls with a 15% core area factor added to same. When the parties
execute this lease it shall he conclusively presumed that any square footage is
as stated in the Summary Sheet. In the event the demising walls are not in place
at the time of the execution of this lease, then it shall be conclusively
presumed that any square footage is as stated in the Summary Sheet from the time
that the Tenant commences occupancy of the Premises. The Tenant further
represents that if it has examined any map or schematic, of the demised
premises, or any map or schematic is attached to the within lease, that said map
or schematic was for illustrative purposes only, and the Tenant did not rely on
said map or schematic.
18. This Lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or the
real property of which the Premises form a part, and to all renewals,
modifications, consolidations, replacements and extensions thereof. This clause
shall be self-operative and no further instrument of subordination shall be
required by any mortgagee. In confirmation of such subordination, Tenant shall
execute promptly any certificates that Landlord may request. Tenant hereby
constitutes and appoints Landlord and Tenant's attorney-in-fact to execute any
such certificate or certificates for and on behalf of Tenant. Landlord will use
its best efforts to obtain a non-disturbance agreement for the benefit or the
Tenant from any future mortgagee.
19. The Tenant shall carry general liability coverage in the amount of
$1,000,000.00 single limit for personal injury and property damage. The Landlord
shall be an additional named insured in all liability policies. All insurance
provided for in this paragraph shall be effected
<PAGE>
under valid and enforceable policies issued by insurance companies of recognized
responsibility authorized to do business in the State of Connecticut. All
policies shall provide that each insured shall receive thirty (30) days notice
of cancellation. The Tenant shall deliver to the Landlord evidence of the policy
with proof of payment of premium thereon as of the date of this lease. The
Tenant shall deliver to the Landlord at least fifteen (15) days prior to the
expiration date of any policy, any renewal thereof, with proof of payment of
premium thereon. The Tenant shall have the right to furnish Landlord with
certificates of insurance instead of insurance policies so long as the
certificates of insurance cannot be canceled without notice. Except for
Landlord's negligence Tenant agrees to indemnify and save harmless Landlord from
and against any and all claims and demands of third persons (including but not
limited to, those for death for personal injuries, or for loss or damage to
property) occurring in or arising, directly or indirectly, out of or in
connection with the use and occupancy of the Premises, or (without limiting the
foregoing) as a result of any acts, omissions, or negligence of Tenant, or their
respective contractors, licensees, invitees, agents, servants, employees,
subtenants or other persons in or about the Premises, and from and against all
costs, expenses, and liability occurring in or in connection with any such claim
or proceeding brought thereon.
20. The Tenant shall take good care of the Premises and any fixtures
and- appurtenances therein and at its sole cost and expense shall make all
repairs thereto as and when needed to preserve them in good working order and
condition, except structural repairs as hereinafter set forth including, without
limitation, normal maintenance, with reasonable precautions to prevent
freeze-ups, and any repairs inherent in the normal operation of equipment. The
Landlord shall make all structural repairs which are defined as repairs to the
roof, brick or cement block walls. It is understood that any structural repairs
necessitated by the negligent or willful acts of the Tenant shall be paid for by
the Tenant. The term repair shall include replacements or renewals when
necessary. Repairs shall be in quality and class at least equal to the existing
work on the Premises. On default of the Tenant to do such work, the Landlord may
do it for the Tenant' s account except for claims of personal injury. The
Landlord's liability for repairs shall be limited to the cost of said repairs or
replacements. The Landlord shall not be responsible for any interruptions to or
loss of occupancy of the Premises while any repairs or replacements are being
made. In the event any repair or work required to be performed by the Landlord
in or upon the Premises or the Landlord's premises of which the Premises is a
part (including, but not limited to work resulting from pollutants or work
required by any appropriate governmental agency) which cost more than
$10,000.00, the Landlord shall have the right to terminate the within lease upon
ninety (90) days prior written notice, or such earlier termination as the
appropriate governmental authority may require.
21. The Tenant shall pay f or any change in the Premises as required by
the Occupational Safety and Health Act of 1970, or for any other change
necessary to make the Premises comply with any applicable building or fire code,
provided said change is necessitated solely as a result of the particular use
made of Premises by the Tenant.
22. The Tenant shall pay as billed by the appropriate utility company
for its own electricity and any other utilities used exclusively by it, and
shall pay to the Landlord for its Proportionate Share of Landlord's expenses for
common electricity as additional rent within fifteen (15) days after receipt of
billing. Tenant shall also pay for electricity for any blower used in
conjunction with a heater in the Premises.
<PAGE>
23. The Landlord shall supply water for non-commercial use only, such
as drinking purposes, toilet, etc. and Tenant shall pay its Proportionate Share
for said water as an Operating Expense. In the event water is required for
industrial or commercial purposes, Tenant shall install its own meter and pay
for said water.
24. The Tenant shall make no alterations without the written permission
of the Landlord which permission will not be unreasonably withheld or delayed.
All alterations, additions, or improvements that may be made by either of the
parties hereto upon the Premises, except production equipment, moveable
furniture and window air conditioning units installed by Tenant, shall at the
option of the Landlord become the property of the Landlord and shall remain upon
and be surrendered with the premises thereof at the termination of this lease
without hinderance, molestation or injury. All items required by the Landlord to
be removed must be removed by the Tenant at the termination of this lease and
the premises shall be restored to its original condition, normal wear and tear
excepted. All plumbing lines and electrical lines leading to or away from
production equipment shall be considered improvements to the realty and shall
remain on the Premises at the option of the Landlord.
Tenant shall submit for Landlord's approval complete plans and
specifications, and a schedule of implementation of the same in the Premises,
describing all improvements to be made in the Premises ("Tenant' s Work") , and
showing in detail the layout and the location of all utilities and partitions.
The drawings shall accurately reflect and constitute acceptance of existing and
as built physical conditions within the Premises. Tenant shall apply for all
governmental approvals and permits required in connection therewith, and shall
prosecute the applications diligently. Landlord shall join in the execution of
applications to the extent necessary, but makes no representation or warranty in
connection with and shall have no liability for Tenant's inability to obtain any
necessary approvals or permits for any reason whatsoever, including, without
limitation, zoning and building ordinances, laws, rules, and regulations. Upon
the approval by Landlord of final plans and specifications, Tenant shall employ
a contractor to complete the premises in accordance with the said approved
plans, specifications, and schedule, and such contractor and subcontractors
shall commence work as hereinbefore provided in this paragraph. Within thirty
(30) days after substantial completion of Tenant's Work, Tenant shall furnish to
Landlord a complete set of "as built" plans and specifications. Tenant shall not
commence any such work without first delivering to Land-lord a policy or
policies of worker's compensation, liability, and property damage insurance,
naming Landlord as additional insured, in limits and with companies acceptable
to Landlord. All of Tenant's work shall be performed in accordance with all
applicable legal requirements, all insurance requirements, and in a good and
workmanlike manner. All of Tenant's construction and the installation of its
fixtures and equipment shall be without interference with other construction or
interruption or the business of other Tenants. Such construction and
installation is and shall be at Tenant' s sole cost and risk, and Tenant shall
hold Landlord harmless against any claims for injury to person or damage to
property arising from Tenant' s work or caused by Tenant. If Tenant shall fail
to perform any of the provisions of this lease relevant to its construction,
then upon notification from Landlord to Tenant to cease work, Tenant shall
remove from the Premises all agents, employees, and contractors of Tenant
forthwith, until such time as Landlord shall have given its consent in writing
for resumptions of work, which consent shall not be unreasonably withheld or
delayed, and Tenant shall in connection therewith, have no claim for damages of
any nature whatsoever against Landlord.
<PAGE>
Throughout the performance of Tenants Work or Alterations, Tenant, at
its expense, shall carry, and require any of its contractors to carry, worker's
compensation insurance in statutory limits, employer's liability in a minimum
amount, comprehensive general liability insurance, including complete operation
endorsement and broad form general liability endorsement and comprehensive auto
liability, including owned, non-owned and hired vehicles, in such limits as
Landlord may reasonably require, with insurers reasonably satisfactory to
Landlord with evidence that such insurance is in effect at or before the
commencement of Alterations and, on request, at reasonable intervals thereafter
during the continuance of Alterations. All insurance requirements by this
subparagraph must name Landlord as an additional named insured. If any
Alterations shall involve the removal of any fixtures, equipment or other
property in the premises which are not Tenant's Property, such fixtures,
equipment or other property shall be promptly replaced at Tenant's expense with
new fixtures, equipment or other property of like utility and at least equal
value unless Landlord shall otherwise expressly consent.
Tenant, at its expense, and with diligence and dispatch, shall procure
the cancellation or discharge of all notices of violation arising from or
otherwise connected with Alteration, or any other work, labor, services or
materials done for or supplied to Tenant, or any person claiming through or
under Tenant, which shall be issued by the City where premises is located, or
any other public authority having or asserting jurisdiction. Tenant shall
defend, indemnify and save harmless Landlord from and against any and all
mechanics' and other liens and encumbrances filed in connection with
Alterations, or any other work, labor, services or materials done for or
supplied to Tenant, or any person claiming through or under Tenant, including,
without limitation, security interests in any materials, fixtures or articles so
installed in and constituting part of the Premises and against all costs,
expenses and liability incurred in connection with any such lien or encumbrance
or any action or proceeding brought thereon. Tenant, at its expense, shall
procure a discharge of record of all such liens and encumbrances within sixty
(60) days after filing thereof.
25. In the event that the Premises shall be partially damaged by fire
or other insured casualty, the Tenant shall give immediate notice thereof to the
Landlord, and the structure shall be repaired at the expense of the Landlord as
speedily as possible (but due allowance shall be made for any delay arising in
connection with adjustment of the fire insurance loss, or from what are known as
"Labor Troubles", or other cause beyond the control of the Landlord) and the
rent accruing shall not cease. In the event that the damage shall be so
extensive as to render more than 25% of the Premises untenantable, the rent
shall cease until such time as the Premises shall again be put in repair, but in
the event of the building being damaged by fire or otherwise to such an extent
as to render it necessary in the judgment of the Landlord or the owners thereof
to rebuild the same (and whether or not the Premises be affected), then, upon
notice to the Tenant, and from thenceforth this lease shall cease and come to an
end, and the rent shall be apportioned and paid up to the date of such damage.
Nothing herein shall be construed to relieve the Tenant from its liability for
negligence.
26. All amounts (other than Base Annual Rental) payable to Landlord by
Tenant under this lease shall be deemed additional rent and Landlord shall have
the same rights and remedies by reason of non-payment of such additional rent as
if Tenant had failed to pay an installment of Base Annual Rental.
27. The Landlord shall at all reasonable times upon notice have access
to the Premises for the purpose of showing the same to applicants for purchase,
mortgage or lease,
<PAGE>
or examining the same, or making repairs or alterations and without notice in
the event of emergency.
28. The Landlord shall have at any time the right and privilege of
making any and all repairs and alterations in the Premises that it may desire,
upon giving the Tenant notice of intention to make such alterations and repairs;
and the Tenant shall make no claim for any damage, loss, cost of expenses,
business interruption, arising out of such alterations or repairs, provided all
such alterations and repairs shall be made within a reasonable time and do not
unreasonably interfere with Tenant' s operation, giving due consideration for
the work to be performed.
29. In case this lease be terminated by reason of the act, default, or
neglect of the Tenant, or in the case of any such default, re-entry, expiration
and/or dispossession by summary proceedings or otherwise, (a) the rent shall
become due thereupon and be paid up to the time of such re-entry, dispossession
and/or expiration, together with such reasonable expenses as Landlord may incur
for legal expenses, attorneys' fees, brokerage and/or putting the Premises in
good order, or for preparing the same for re-rental; and (b) Landlord may re-let
the Premises or any part/parts thereof either in the name of Landlord or
otherwise, for a term or terms, which may at Landlord' s option be less than or
exceed the period which would otherwise have constituted the balance of the-term
of this lease and may grant concessions or free rent to the extent it is
commercially reasonable for similar space; (c) Tenant or the legal
representatives of the Tenant shall also pay Landlord as liquidated damages for
the failure of the Tenant to observe and perform said Tenant's covenants herein
contained, any deficiency between the rent hereby reserved for the balance of
the term and/or covenanted to be paid for the balance of the term and the net
amount, if any, of the rents collected on account of the lease or leases of the
Premises for each month of the period which would otherwise have constituted the
balance of term of this lease. In computing such liquidated damages there shall
be added to the said deficiency such reasonable expenses as Landlord may incur
in connection with re-letting, such as reasonable legal expenses, reasonable
attorneys' fees, brokerage actually incurred and for keeping the Premises in
good order or for preparing the same for reletting. Any such liquidated damages
shall be due at once or at Landlord's option, paid in monthly installments by
Tenant on the rent day specified in this lease and any suit brought to collect
the amount of the deficiency for any month shall not prejudice in any way the
rights of Landlord to collect the deficiency. Landlord at Landlord's option, may
make such alterations, repairs, replacements in the Premises as Landlord in
Landlord's sole judgment considers advisable and necessary for the purpose of
re-letting the Premises; and the making of such alterations shall not operate or
be construed to release Tenant from liability hereunder as aforesaid. Landlord
shall make reasonable efforts to re-let the Premises. However, in the event that
the Premises are re-let, the Tenant shall remain responsible for the aforesaid
damages for Landlord's failure to collect the rent under such re-letting,
provided Landlord makes reasonable efforts to collect such sum. Nothing herein
shall require Landlord to commence an action to collect the rent under such
re-letting.
30. The Tenant shall have no right to give a security interest to any
creditor or vendor on items which would constitute an alteration, addition or
improvement herein. Nothing in this lease shall be construed by any person
supplying materials or labor as consent by the Landlord for such work to be
performed so as to permit the placing of any mechanic's liens. The Landlord
shall not be responsible for any work ordered by the Tenant.
<PAGE>
31. If the Tenant shall default in the performance of any of the terms,
covenants and conditions of this lease, the Landlord, after thirty (30) days
written notice to the Tenant specifying such default, may perform the same for
the account and at the expense (including reasonable counsel fees actually
incurred) of the Tenant and the amount of any payments made or other expenses
made by the Landlord for such purpose, with interest thereon at the rate of ten
(10%) percent per annum, shall be deemed additional rent and forthwith shall be
repaid by the Tenant to the Landlord, or, at the Landlord's election, may be
added to any subsequent installment of rent due and payable under this lease.
The provisions of this paragraph shall be inapplicable if within twenty (20)
days after such notice by the Landlord, the Tenant shall have cured such
default, or shall have commenced and shall be diligently proceeding to cure it.
32. The Tenant shall have a right to erect and place a sign in such
area as the Landlord may permit, subject to the rules and regulations of the
Landlord and to the prior written consent of the Landlord and any applicable
municipal regulations, which consent shall not be unreasonably withheld or
delayed.
33. Any and all notices required or permitted to be given under any of
the provisions of this lease shall be in writing and shall be sent by a
nationally recognized private carrier of overnight mail or by registered or
certified mail, return receipt requested, addressed to the Landlord at the
address designated for notice in the Summary Sheet, and to the Tenant at the
address designated as such in the Summary Sheet, or to such other addresses as
either of the parties hereto shall designate in the manner herein provided. Any
notice thus given by either party shall be deemed to have been given at the time
such notice shall be mailed, as aforesaid, in any post office or branch post
office regularly maintained by the United States government or deposited with
such overnight carrier. All notices shall be deemed to have been received three
(3) business days after notice is given.
34. The Tenant will commit no waste nor suffer the same to be committed
therein, nor injure or misuse the Premises, and replace all broken or damaged
window glass and will deliver up to the Premises broom clean at the expiration
or sooner termination of its tenancy, in as good condition as they are now in,
or shall be put in by the said Landlord during said term, ordinary wear and
tear, fire and other unavoidable casualties excepted. The term waste shall
include wastage of water and heat.
35. The Tenant agrees that it will not assign the lease or sublet the
whole or any portion of the premises without the prior written permission of the
Landlord, which will not be unreasonably withheld or delayed. It is understood
that if the Landlord consents to said assignment or sublet and building is not
fully lease, that a condition of said approval will be that any consideration
paid or rent paid by said assignee or sub-tenant for said assignment or sub-
tenancy, shall be shared equally between the Landlord and the Tenant to the
extent that it exceeds the rental provided for herein or exceeds the rental
divided by the square footage of the demised premises multiplied by the square
feet sublet in the event that less than the whole premises is sublet. In the
event, of a sub-let and Tenant fails to pay rent as provided herein, the
Landlord at any time shall have the right to demand that the sub-tenant pay its
rent directly to the Landlord and in the event the sub-tenant shall fail to do
so, the Landlord shall have the right to evict the sub-tenant in the same manner
as if it were the Tenant.
36. In the event the whole of the Premises is taken by any government
or corporation
<PAGE>
or other entity under the right of eminent domain, then this lease shall
terminate as of the date that title vests in the condemning authority/and the
rent shall cease at such time.
In the event the Premises is partially taken, either party shall
have the right to te terminate if the party so elects in writing, within sixty
(60) days after title vests in the condemning authority. In the event of a
partial taking and this lease is not terminated, the tenancy shall continue
under the terms provided for herein, the Landlord shall restore the Premises if
necessary, at its sole expense and the rent, and additional rent provided for
herein shall be adjusted proportionately on a square foot basis with a
reasonable adjustment in the event of a decrease in parking having an effect on
Tenant business. In no event shall the Tenant have the right to claim for the
unexpired term of the lease, and it shall not share in any award of the Landlord
due from the condemning authority. Nothing herein shall preclude the Tenant from
making any claim with the condemning authority for its personal property and
machinery and equipment, moving expenses, if any, provided this does not
interfere with Landlord's award.
37. In the event shall fail to surrender the Premises upon termination
and demand, Landlord, in addition to all other remedies available to it
hereunder, shall have the right to receive, as liquidated damages for all the
time Tenant shall so retain possession of the Premises or any part thereof, an
amount equal to. 150% the monthly rental payment for each month or part thereof.
If Tenant remains in possession of the premises after the expiration of the term
of the within Lease with Landlord's consent, such continued occupancy shall be
deemed to be a Tenancy at Will terminable on the last day of any month after
thirty (30) days written notice by either party under the same terms and
conditions of the within Lease and not a renewal of this Lease and the Landlord
shall be entitled to rental in an amount equal to 115% of the monthly rental
payments for each month or part thereof that the Tenant remains. Any breach of
the within Lease by the Tenant including but not limited to nonpayment of rent
shall be deemed to be a continuing breach during the Tenancy at Will tenancy.
38. Tenant agrees to furnish to third parties designated by Landlord,
from time to time, certificates stating whether or not its Lease is in full
force and effect in accordance with its terms, whether or not there are any
amendments thereto, the date to which rent has been paid and whether or not
Tenant has exercised any renewal option contained herein and whether or not
Tenant has any claims against Landlord hereunder.
39. Tenant shall not accumulate any boxes, waste material or any other
rubbish outside of the Premises except in the areas and containers designated
for such purpose.
40. At trial the submission by the Landlord of any bills received for
items to be paid by the Tenant for the within Lease shall be prima facie
evidence as to the amount of billing and its reasonableness.
41. All property permitted or required to be removed by Tenant at the
end of the term remaining in the Premises after Tenant's removal shall be deemed
abandoned and may, at the election of the Landlord, either be retained as
Landlord's Property or may be removed from the Premises by Landlord at Tenant's
expense provided Landlord shall send to Tenant 30 day notice of its intention.
If the Premises becomes vacant, deserted or not in active operation for a period
of thirty (30) days and rent is not paid when due, then the Premises and its
contents, at Landlord' s option, shall be deemed to have been abandoned and the
Landlord shall have the
<PAGE>
right to remove all of said contents and dispose of as the Landlord sees fit,
provided that the Landlord shall give written notice to Tenant to remove its
property within 30 days after the mailing of said notice and the Tenant shall
fail to remove within said 30-day period. Notice required under his paragraph
may be sent by certified mail without return receipt.
42. If, in connection with obtaining financing for the land and/or
building, a banking, insurance or other recognized institutional lender shall
request reasonable modifications in this Lease as a condition to such financing,
Tenant will not unreasonably withhold, delay or defer its consent thereto,
provided that such modifications do not increase the obligations of Tenant
hereunder or material adversely affect the leasehold interest hereby created or
Tenant's use and enjoyment of the Premises. Landlord shall reimburse Tenant for
any reasonably incurred legal fees in complying with the provisions of this
subparagraph.
43. If Landlord is unable to give possession of the Premises on the
date of the commencement of the term hereof because of the holding over or
retention of possession of any Tenant or occupant, Landlord shall not be subject
to any liability for failure to give possession on said date and the validity of
this Lease shall not be impaired nor shall the same be construed to extend the
term of this Lease, but the rent payable hereunder shall be abated until the
Landlord shall have given Tenant written notice that the Premises are ready for
occupancy.
44. In the event the particular activities of the Tenant shall cause an
increase in insurance rates for the Landlord or any other tenant of the
Landlord, the Tenant shall pay, as additional rent, said excess to be paid
within fifteen (15) days after receipt of billing by Landlord.
45. The Lease contains the entire agreement between Landlord and Tenant
relating to the leasing of the Leased Premises. Each party hereto expressly
acknowledges and agrees that it is not relying upon any warranties,
representations, promises or statements by the other party except to the extent
that the same are expressly set forth in this lease.
46. See Rider A annexed hereto for additional provisions of this lease.
47. The parties recognize the broker set forth in the Summary Sheet as
the broker who was the procuring cause of this Lease and Landlord shall pay its
brokerage fee. This Lease is consummated by the Landlord in reliance on the
representation of the Tenant that or other broker or agent, as the case may be,
brought the premises to the Tenant' s attention or was in any way a procuring
cause of this Lease. The Tenant hereby agrees to indemnify and hold harmless the
Landlord against any liability by reason of the claim of any broker or agent for
a commission on account of this Lease, provided, that it is adjudged by a court
of competent jurisdiction that a commission is due by reason of such broker or
agent calling the premises to Tenant's attention or interesting Tenant therein,
said indemnity to include all costs of defending any such claim, including
reasonable attorneys' fees. Landlord represents that it has given no broker an
"exclusive" and will save the Tenant harmless for any brokerage claims based
solely on an exclusive listing.
48. The Landlord is hereby granted a lien, in addition to any statutory
lien or right to distrain that may exist, on all personal property of the Tenant
in or upon the demised premises, to see payment of the rent and performance of
the covenants and conditions of this Lease.
<PAGE>
49. Landlord's obligations under this Lease (other than a failure to
apply insurance proceeds for escrow funds in accordance with the terms of this
Lease) shall be limited to the real estate of which the demised premises is a
part or the proceeds of a sale of the real estate pursuant to foreclosure of a
judgment against the Landlord.
50. The parties are aware of the extensive delays with respect to jury
trials. Therefore, Landlord and Tenant mutually waive any and all rights which
either may have to request a jury trial in any proceedings at law or in equity
in any court of competent jurisdiction.
51. Tenant agrees that this Lease Agreement constitutes a commercial
transaction for the purpose of and as provided in section 52-278F of the
Connecticut General Statutes and the Tenant herein hereby waives any right it
may have to a hearing prior to Landlord's obtaining a prejudgment remedy as
provided for in such statute.
IN WITNESS WHEREOF, the Landlord and the Tenant have respectively
executed these presents this 9th day of September 1996.
Attest:
- -------------------------------
Landlord
By:/s/
-----------------------
duly authorized
By:/s/ William E. Wheaton
------------------------
Tenant
<PAGE>
RIDER "A"
1. As additional rent, Tenant agrees to pay to the Landlord within
fifteen (15) days after the presentation of the tax bill, Tenant's proportionate
share (as hereinafter defined) of any taxes levied upon or assessed against the
property of which the premises herein demised form a part, in excess of the
amount of annual taxes set forth in the Summary Sheet to the extent that such
excess is allocable to the term hereof. For the purposes of the preceding
sentence, the term "taxes" shall include (a) all real estate taxes and special
assessments levied upon or assessed against the land and buildings or any tax
imposed on or in respect of the land and buildings or any rental income
therefrom (computed as if the land and buildings were the sole property of
Landlord) in total or partial substitution for real estate taxes (except general
income taxes) . Tenant shall pay the total increase of taxes attributable to any
improvement on the Leased Premises made by or for the Tenant but no part of any
increase of taxes attributable to any improvement of the land and/or buildings
made by any other tenant of Landlord.
2. The tenant shall pay as additional rent its proportionate share of
any liability, fire and extended coverage insurance premiums for the entire
premises in excess of the insurance premium in effect on the first day of the
month preceding the commencement of the term of this Lease to the extent such is
applicable to the term hereof and the entire amount of any insurance increase
particularly related to the activity of the Tenant. The Landlord reserves the
right to make reasonable increases in its insurance coverage to reflect changing
conditions. Said sum shall be paid within ten (10) days after receipt of billing
by the Landlord.
3. As additional rent, Tenant agrees to pay to Landlord the Tenant's
Proportionate Share of any Operating Expenses (as hereinafter defined) in excess
of such Operating Expenses for the calender year preceding the commencement of
the term of the Lease (Expense Base Year) . During the month of July of each
year, the Tenant will be billed for 1/2 of said excess for the period from the
preceding January 1 through June 30. During the succeeding month of January of
each year, the Tenant will be billed for the period from July 1 through December
31, adjusted to reflect actual expenses for the entire year. In the event the
lease has commenced after commencement of a calender year or has been terminated
before the end of the year, an appropriate adjustment shall be made to reconcile
such actual Operating Expenses with the estimated payments made as aforesaid,
within thirty (30) days after the statement setting forth actual Operating
Expenses is submitted by the Landlord. In the event the lease has been
terminated before the end of the year, the adjustment will be made at the
termination of the tenancy, and any payments due may be added to or deducted
from the security deposit.
4. Tenant's Proportionate Share" will be the Proportionate Share as
designated on the Summary Sheet.
5. "Operating Expenses" shall mean all expenses incurred in in respect
to the operation, maintenance and repair of the land land and buildings and
replacement of parts thereof in accordance with generally accepted principals of
sound management and generally accepted accounting practices as applied to the
operation, maintenance, and repair of multi-purpose commercial in the City of
Stamford, including, without limitation, (a) wages, salaries, and other
compensation to Landlord's employees or agents engaged in the operation of the
land, buildings and in the furnishings of cleaning, janitor, handyman and other
like services, (b) costs of repairs to and replacement and physical maintenance
of the land and buildings, (c)
<PAGE>
costs of painting any part of the buildings (other than painting costs incurred
in connection with the occupancy of any tenant), (d) costs of cleaning services
in the, buildings and areas adjoining and serving the buildings which are
rendered for the benefit of all tenants in the buildings, (e) Management fees
equal to 5% of the gross rentals and operating expenses shall be "net" only, and
for that purpose shall be reduced by the amounts of any reimbursement or credit
received or receivable by Landlord. Capital repairs, replacements and
improvements will be expensed as amortized on the books of-the Landlord and paid
only over the term of the lease. An equitable adjustment will be made in the
event Landlord's premises is act fully occupied. Excluded from the term
Operating Expenses is snow removal and garbage removal for which separate
charges will be made as hereinafter set forth.
6. The Tenant shall pay an additional rent within 15 days of billing
the sum of $35.00 for each snow plowing and for each sanding of the common areas
for the building of which the demised premises is a part.
The Tenant shall also pay as additional rent the sum of $65.00 per
month with its monthly rental payment for garbage removal. This monthly garbage
removal payment is based upon, the present billing by an independent garbage
collector for the entire building of which the demised premises is a part. In
the event the monthly billing to the Landlord is increased, the $65.00 monthly
garbage removal payment of the Tenant shall be increased in the same proportion
as the Landlords billing has been increased or in the event Tenants usage shall
cause an increase in billing, Tenant shall pay the entire cost of said increase.
Landlord at its option may cease garbage removal for the entire building, in
which event Tenant shall arrange and pay for its own garbage removal from the
premises of which the Leased Premises is a part.
7. The demised premises is electrically heated and air conditioned. The
Tenant at its expense shall maintain said heating and air conditioning systems
at its expense together with a reasonable preventative maintenance program.
The demised is not separately metered but shares a meter with the
tenant in the abutting space which space is known as Space No. 2 . The parties
agree that as long as the existing tenant remains on its premises the Tenant
will as additional rent pay 60% of the electricity as billed for the shared
meter. In the event the abutting premises becomes vacant or another tenant
occupies the premises with a significantly different electric usage, or Tenants
electric usage is greater than normal office use an appropriate adjustment will
be made by the Landlord between the parties that share said meter.
8. During each year of the term, including the option term or
extensions, if any, commencing September 1, 1997, the Base Annual Rent shall be
increased as hereinafter set forth:
The Base Annual Rent shall be increased in the same proportion as an
increase in the Cost of Living as shown by the percentage difference between the
Consumer Price index published by the Department of Labor, Bureau of Labor
Statistics, for the New York, N.Y. /Northeastern New Jersey Urban Area ( All
Items - all Urban Consumers), 1982-1994=100), for the month of July 1996, and
the corresponding Consumer Price Index for the month of July preceding the
appropriate year for the commencement of an increase and payable monthly as
provided for in the Lease.
<PAGE>
For example, if the appropriate Consumer Price Index (C.P.I.) for July
1996, is 100 and the appropriate C.P.I. for July 1997, is 110 then the Base
Annual Rental of $31,200.00 would be increased by 10% to $34,320.00 payable
$2,860.00 per mouth commencing September 1, 1997 as provided for in the Lease.
For the year commencing September 1, 1998 (if applicable)a similar
computation will take place using the mouth of July 1996 and the month of July
1998 to compute the increase and so on for each year during the term.
At no time will the Base Annual Rental be decreased. In the event there
is a change in the Government reporting of the Consumer Price Index, then an
appropriate adjustment will be made.
In the event the Consumer Price Index is discontinued by the Department
of Labor, Bureau of Labor Statistics and the parties cannot agree upon an
appropriate substitute then the proof of such charges, upon request by the
Tenant.
8. Notwithstanding the provisions contained in the Lease Rider "A" such
that the Tenant will, indemnify the Landlord from loss caused by any defaults by
the Tenant the Tenant's use and occupancy of the premises, and any acts or
omissions or negligence of the Tenant, such indemnity shall not apply in the
event any claims arising out of the Landlords negligence.
9. The insurance policies referred to in this Lease shall, to the
extent obtainable, contain provisions waiving the insure's right of subrogation
and to the extent such insurance provided for herein permits waiver of
subrogation, Landlord and Tenant hereby release each other of and from liability
for any clsim covered by insurance permitting waiver of subrogation. If, and to
the extent, that such waiver of subrogation can be obtained only by the payment
of additional premiums, then the party benefitting from the waiver shall pay
such premium with ten (10) days after receipt of written notice of the amount of
such premium or sall be deemed to have agreed that the party obtaining said
insurance coverage shall be free of any further obligation under the provisions
hereof with respect to waiver of subrogation.
10. (a) In the event of a breach or threatened breach by Landlord of
any of the covenants or provisions of this Lease, Tenant shall have the right to
injunction and the right to invoke any remedy allowed at law or in equity.
Mention in this Lease of any particular remedy shall hot preclude Tenant from
any other remedy, in law or in equity.
(b) In addition to any other remedy herein provided to Tenant for
any failure or default by Landlord to comply with the terms and conditions of
this Lease, Tenant without being under any obligation to do so, and without
thereby waiving such default, may remedy such default of Landlord for the
account and at the expense of Landlord. If Tenant makes any expenditures or
incurs any obligations for the payment of money in connection therewith,
including but not limited to attorney's fees and costs in instituting,
prosecuting or defending any action or proceeding, such sums paid and
obligations incurred, together with interest at the rate of ten (10%) percent
per annum, shall be paid to Tenant by Landlord, provided Tenant has given
Landlord 15 days prior written notice and a reasonable opportunity to cure.
11. The rights and remedies of each of the parties contained in this
Lease are not
<PAGE>
intended to be exclusive, but as additional to any and all rights and remedies
the parties would otherwise have by law.
12. With respect to Paragraph 34 of the Lease, Landlord agrees to be
responsible for exterior glass breakage if resulting from no fault of the
Tenant. Tenant shall have the burden of proving that it was not at fault.
13. In the event of partial condemnation and Tenant exercises its
option to terminate within said 60 day period, the rent shall cease and the
Lease shall terminate 30 days after tenant gives notice or when Tenant vacates
after notice whichever is later. If Landlord gives notice then rent shall cease
when Tenant vacates the premises.
<PAGE>
GUARANTY
A. In consideration of the letting of the premises described in the lease to
which this guaranty is attached ("the Lease") , the undersigned DOES HEREBY
ABSOLUTELY GUARANTEE to the landlord, its successors and assigns, the full and
prompt performance by Tenant of all of the obligations of Tenant under the
Lease, including, without limitation, the payment by Tenant of all rent reserved
under the Lease, and any arrears thereof, and any other sum or sums required to
be paid by Tenant under any of the terms of the Lease, that may be or become due
or payable to Landlord, its successors and assigns, and the payment by Tenant of
any and all Tenant of any of the covenants or agreements required to be
performed by Tenant pursuant to the Lease.
Said guaranty is limited to a sum not to exceed three (3) months rent,
additional rent, any actual damage done to the demised premises, and any damages
arising out of a breach of paragraph 9 of the Lease, together with reasonable
attorney's fees in the event suit is instituted to collect and the landlord
prevails.
B. The undersigned waives all requirements of notice of the acceptance of this
Guaranty. This Guaranty shall be a continuing guaranty.
C. This Guaranty shall not be discharged, impaired, or in any way affected, nor
shall the undersigned be liability hereunder, because or on account modification
alteration, amendment, or extension, at any time and from time to time, of any
of the terms Lease, or by reason of any other act or thing which, but for this
provision of this Guaranty might be deemed a legal or equitable discharge of a
surety, or by reason of the failure of Landlord, its successors or assigns, to
proceed promptly or otherwise; and the undersigned hereby expressly waives and
surrenders any defense to its liability hereunder based upon any of the
foregoing waivers, modification, alterations, amendments, extensions, or delays,
or any of them.
This Guaranty shall inure to the benefit of Landlord, its successors and
assigns, and shall bind the undersigned and its successors and assigns.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as of the
day of 1995.
GUARANTOR:
/s/ William E. Wheaton
----------------------------
----------------------------
<PAGE>
RIDER "B" TO LEASE AGREEMENT BETWEEN
456 GLENBROOK ROAD ASSOCIATES AND VC SOLUTIONS, INC.
1. Consent
Where the Landlord's consent must be obtained, that consent will be
unreasonably "delayed or qualified." In addition, such consent shall be deemed
given within a ten (10) days unless the Landlord responds in writing to the
contrary.
2. Alternations
Notwithstanding the language contained in Article 24 of the Lease, the
Landlord's consent shall not be required where (a) the alterations do not
adversely affect the building's appearance, its structural integrity, the
building systems, or other Tenants; (b) the alterations are performed in a
workmanlike manner equal in quality to the existing building, and in compliance
with all laws and codes; (c) the Landlord is protected against liability from
personal injury and property damage and from mechanics lien arising out of the
alterations; and (d) the Landlord is given copies of the plans and
specifications.
3. Assignment and Sublease
Notwithstanding the language contained in Article 35 of the Lease, the
Tenant has the right to assign or sublease (collectively referred to hereafter
as "sublease") to affiliated entities without consent. In addition, the Tenant
shall also have the right to sublease without consent so long as it would not
affect the Landlord's vital interests, such as subleasing to a reputable and
financially responsible Tenant whose use is permitted under the lease and whose
tenancy imposes no additional obligations upon the Landlord.
Further, where the Lease requires that the Tenant equally share with
the Landlord the net profit from a sublease, the determination of net profit
shall be made by first deducting from the total of the rent received from the
sub-tenant, reimbursement of all of the Tenant's costs in such subletting,
including brokerage commissions, work letter, rent concessions, lease
assumptions, the period the space was vacant before it was sublet, advertising
costs, and legal fees.
4. Brokers
Notwithstanding the language contained in Article 47 of the Lease, the
Tenant's representation and indemnity provision set forth therein shall not
apply in the event a broker brings a frivolous claim based on minimal contact
with the transaction. In addition, the Landlord shall indemnify and hold
harmless the Tenant against brokerage claims arising from the Landlord's dealing
with brokers.
5. Compliance With Laws
Notwithstanding the language contained in Article 9 and 21 of the
Lease, the Tenant shall not be obligated to comply with laws applicable to the
building at large, including but not limited to: installing sprinklers, fire
escape exits, repairing building facades, or making capital improvements.
6. Environmental Provisions
Notwithstanding the language contained in Article 9 of the Lease, the
Tenant's representation and indemnity provision set forth therein shall not
apply in the event of any pre-
<PAGE>
existing environmental problems. The Landlord shall indemnify and hold harmless
the Tenant from all claims, damages, loss, liability, penalty and obligations
due to any breach of Article 9 as it relates to any pre-existing environmental
conditions as set forth in Article 9 or as it relates to any environmental
conditions caused by any other tenant.
The Landlord represents that the premises known as 456 Glenbrook Road,
Stamford, Connecticut do not contain hazardous substances, asbestos, PCBs, or
underground storage tanks.
7. Taxes
Notwithstanding the language contained in Article 1 of Rider "A," the
Landlord shall have the ability to challenge any assessments if the Landlord
refuses to file and challenge or appeal.
8. Operating Expenses
Notwithstanding the language contained in Rider "A," the Landlord shall
provide proof of such charges, upon request by the Tenant.
9. Indemnity
Notwithstanding the language contained in the Lease or Rider "A" such
that the Tenant will indemnify the Landlord from loss caused by any defaults by
the Tenant, the Tenant's use and occupancy of the premises, and any acts or
omissions or negligence of the Tenant, such indemnity shall not apply in the
event any claims arising out of the Landlord's negligence.
10. Insurance
The Landlord represents that the building is insured for damage by fire
or other casualty sufficiently to rebuild.
11. Waiver of Subrogation
The insurance policies referred to in this Lease shall, to the extent
obtainable, contain provisions waiving the insure's right of subrogation and to
the extent such insurance provided for herein permits waiver of subrogation,
Landlord and Tenant hereby release each other of and from liability for any
claim covered by insurance permitting waiver of subrogation. If, and to the
extent, that such waiver of subrogation can be obtained only by the payment of
additional premiums, then the party benefitting from the waiver shall pay such
premium within ten (10) days after receipt of written notice of the amount of
such premium or shall be deemed to have agreed that the party obtaining said
insurance coverage shall be free of any further obligation under the provisions
hereof with respect to waiver of subrogation.
12. Remedies
(a) In the event of a breach or threatened breach by Landlord of any of
the covenants or provisions of this Lease, Tenant shall have the right to
injunction and the right to invoke any remedy allowed at law or in equity and
other remedies were not herein provided for. Mention in this Lease of any
particular remedy shall not preclude Tenant from any other remedy, in law or in
equity.
(b) In addition to any other remedy herein provided to Tenant for any
failure or default by Landlord to comply with the terms and conditions of this
Lease, Tenant, without being under any obligation to do so, and without thereby
waiving such default, may remedy such default of Landlord for the account and at
the expense of Landlord. If Tenant makes any expenditures or
<PAGE>
incurs any obligations for the payment of money in connection therewith,
including but not limited to attorney's fees and costs in instituting,
prosecuting or defending any action or proceeding, such sums paid and
obligations incurred, together with interest at the rate of twelve (12%) percent
per annum, shall be paid to Tenant by Landlord, on demand, or shall be taken as
an offset to the rent.
13. Miscellaneous
A. Landlord shall use Landlords commercially reasonable efforts to
obtain the agreement of any subsequent mortgagee that it will not disturb
Tenant's tenancy upon a foreclosure so long as Tenant is not in default
hereunder.
B. Force Majeure. In the event that either hereto shall be delayed or
hindered in or prevented from the performance of any act required hereunder by
reason of strikes, lock-outs, labor troubles, inability to procure materials,
failure to power, restrictive governmental laws or regulations, riots,
insurrection, war, acts of God, or other reason of a like nature not the fault
of the party delayed in performing work or doing acts required under the terms
of this Lease, then performance of such act shall be excused for the period of
the delay and the period for the performance of any such act shall be extended
for a period equivalent to the period of such delay.
C. Binding Effect. All rights and liabilities herein given to, or
imposed upon, the respective parties hereto shall extend to and bind the
respective heirs, executors, administrators, legal representative, successors
and permitted assigns of the said parties. The parties hereto, by the signing
hereof, agree for themselves and for their heirs, legal representatives,
successors and assigns to execute any instruments and to take any actions which
may be necessary or proper in carrying out the provisions of this Lease. The
liability of any person, firm, corporation or limited liability company named as
Landlord or Tenant herein shall be joint and several.
D. Remedies. The rights and remedies of each of the parties contained
in this Lease are not intended to be exclusive, but as additional to any and all
rights and remedies the parties would otherwise have by law.
<PAGE>
LEASE MODIFICATION AGREEMENT
AGREEMENT made this 5th day of June, 1998 between the Landlord and
Tenant, modifying the existing Lease and Lease Modification Agreement, dated
April 16, 1997.
WHEREAS, the Tenant is desirous of terminating the "Additional Lease"
spaces described in the Lease Modification Agreement dated April 16, 1997.
NOW THEREFORE, in consideration of their mutual agreement, the parties
agree as follows:
1. The Landlord and Tenant hereby agrees to terminate the Lease
for the "First Additional Premises and Second Additional
Premises", as described in the Lease Modification Agreement.
2. The termination date is July 1, 1998.
3. The Tenant agrees to Lease the storage are designated as
Storage Area 2 in the basement for the sum of $100.00 per
month.
4. The Landlord and Tenant agree that the original premises will
remain with the Tenant, as described in the original Lease and
Lease Modification Agreement dated April 16, 1997.
5. The parties agree that Paragraph 8, 10, 11 of the Lease
Modification Agreement are void and no longer in effect.
6. In summary, Tenant will remain in its existing space until
April 30, 1999 for the monthly rent of $2,730.00 and lease the
storage space in the basement for an additional $100.00 per
month.
7. Tenant agrees to pay all current charges through May 31, 1998
by June 8, 1998, in the amount $6,760.25
8. Tenant agrees to pay June rent charges, Including Electric, in
the amount of $6,534.98 by June 15, 1998.
9. In all other respects and excepts as specially modified
herein, the Lease shall remain in full form and effect.
LANDLORD, 456 GLENBROOK ROAD ASSOCIATES
By: /s/ Alex Goldblum
--------------------------
Alex Goldblum
TENANT, VC SOLUTIONS, INC.
By: /s/ William E. Wheaton
--------------------------
<PAGE>
VCS TECHNOLOGIES, INC.
1997 INCENTIVE STOCK OPTION PLAN
1 Options Granted Under Plan. Under this Incentive Stock Option Plan (the
"Plan") of VCS Technologies, Inc. (the "Company") stock options which qualify as
incentive stock options ("Options") under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), may be granted to eligible employees to
purchase shares of the Company's common stock (the "Common Stock"). The Plan is
designed to enable the Company to attract, retain and motivate its employees by
providing for or increasing the proprietary interests of such employees in the
Company.
2 Stock Subject to Plan. The maximum number of shares of the Company's Common
Stock subject to this Plan and for which Options granted hereunder may therefore
be exercised is seven hundred and fifty thousand (750,000) shares. Shares of
Common Stock subject to the unexercised portions of any Options granted under
this Plan which expire or terminate or are canceled may again be subject to
Options under the Plan.
3 Eligible Employees. The employees eligible to be considered for the grant of
Options hereunder are any persons regularly employed by the Company in any
capacity on a full-time, salaried basis.
4 Option Terms.
4.1 Exercise Price. Except as otherwise provided herein, the exercise
price for each Option granted hereunder will be fixed by the Board and will be
not less than 100% of the Fair Market Value (as defined in Section 14 herein) of
the Common Stock on the date of the grant of the Option. Neither the Company,
the Company's Board of Directors (the "Board") nor any member thereof makes or
will make any representation or warranty to any Optionee regarding the Federal
or State income tax consequences or effects of participation in the Plan.
4.2 Granting of Options. Subject to the provisions and limitations of
this Plan, and subject to applicable securities, tax and other laws and
regulations, Options may be granted at such time or times and pursuant to such
terms and conditions as may be determined by the Board.
4.3 Duration. Options may not be granted under this Plan after December
27, 2006. Each Option will provide that it may be exercised in not more than
such number of installments as set forth in the "Incentive Stock Option
Agreement" for such Option between the Company and the Optionee; provided,
however, that no Option will be exercised in full or in part after the
expiration of ten (10) years from the date such Option is granted.
4.4 Payment. Payment for Common Stock purchased upon any exercise of an
Option granted under this Plan will be made in full in cash (including payment
by check) concurrently with such exercise.
4.5 Cessation of Employment. Except as otherwise specifically provided
in the Incentive Stock Option Agreement, in the event an Optionee retires or
otherwise ceases to be employed by the Company for any reason, including leaves
of absences (other than a termination by death, permanent or total disability
within the meaning of Section 22(e) of the Code, or for cause), such Optionee
will have the right to exercise any Options which became exercisable prior to
retirement or cessation of employment but only within a period of three (3)
months from the date of cessation of employment (but in any event not later than
the termination date of the Option), after which time any unexercised portion of
all outstanding Options will expire. In no event and under no circumstances may
an Option be exercised by an employee (or his personal representative) after
termination of the Optionee's employment for cause.
1
<PAGE>
4.6 Disability. In the case of an Optionee who becomes permanently
disabled within the meaning of Section 22(e)(3) of the Code while in the employ
of the Company, any Option which was exercisable on the date when such Optionee
became disabled may be exercised within one (1) year after such Optionee ceases
employment (but in no event later than the termination date of the Option) after
which time any unexercised portion of all outstanding Options will expire.
4.7 Death. In the event of the death of an Optionee while in the employ
of the Company, the estate of the deceased Optionee will have the right to
exercise any Options which became exercisable prior to the Optionee's death but
only within a period of one (1) year from the date of the Optionee's death (but
in no event later that the termination date of the Option) after which time any
unexercised portion of all outstanding Options will expire. In the event an
Option is exercised by the estate of an Optionee, the Company will be under no
obligation to issue shares of Common Stock upon exercise unless and until the
Company is satisfied that the person exercising the Option is the duly appointed
legal representative of the Optionee's estate.
4.8 Nontransferability. Each Option granted under this Plan is
nontransferable by the Optionee other than by will or the laws of descent and
distribution, and is exercisable only in accordance with the provisions of this
Plan.
5 Incentive Stock Option Agreement. Each Option granted under this Plan will be
evidenced by a Incentive Stock Option Agreement. All forms of Incentive Stock
Option Agreement will contain such provisions, restrictions, and conditions as
are not inconsistent with this Plan but need not be identical. The provisions of
this Plan will be incorporated by reference in each Incentive Stock Option
Agreement. Options granted under this Plan will contain such other terms and
provisions as the Board may authorize, including but not limited to:
(i) vesting schedules governing the exercisability of such
Options;
(ii) provisions for acceleration of such vesting schedules in
certain events;
(iii) arrangements whereby the Company may fulfill any tax
withholding obligations it may have in connection with the
exercise of such Options;
(iv) provisions imposing restrictions upon the transferability of
shares of Common Stock acquired on exercise of such Option,
whether required by this Plan or applicable securities laws or
imposed for other reasons; and
(v) provisions regarding the termination or survival of any such
Option upon the Optionee's death, retirement or other
terminations of employment and the extent, if any, to which
any such Option may be exercised after such event.
6 Adjustments. In the event the Common Stock is changed into or exchanged for a
different number or kind of shares of stock or other securities of the Company
or of another corporation (whether by reason of merger, consolidation,
reorganization or otherwise), or if the number of outstanding shares of Common
Stock are increased through a stock split or the payment of a stock dividend,
then there will be substituted for or added to each share of Common Stock which
is subject to an Option the number and kind of shares of securities into which
each outstanding share of Common Stock is changed. Outstanding Options will also
be amended as to price and other terms if necessary to reflect the foregoing
events. No right to purchase fractional shares will result from any adjustment
in Options pursuant to this Section 6. In case of any such adjustment, the
shares subject to the Option will be rounded down to the nearest whole share.
Notice of any adjustment will be given by the Company to the holder of each such
Option which will have been so adjusted and such adjustment (whether or not
notice is given) will be effective and binding for all purposes of the Plan. Any
other provision hereof to the contrary notwithstanding, in the event the Company
is a party to a merger or other reorganization, outstanding Options will be
subject to
2
<PAGE>
the agreement of merger or reorganization. Such agreement may provide, without
limitation, for the assumption of outstanding Options by the surviving company
or its parent, for the continuation by the Company (if the Company is a
surviving entity), for accelerated vesting and accelerated expiration, or for
settlement in cash.
7 Administration. The Plan will be administered by the Board or a committee
appointed by the Board (the "Committee"). For purposes of this Plan and any
Incentive Stock Option Agreement, any action taken with respect to this Plan or
any Incentive Stock Option Agreement by the Committee will be binding in the
same manner as if such action were taken by the Board. The interpretation and
construction by the Board of any term or provision of the Plan or of any Option
granted under it, including without limitation any determination of adjustments
required pursuant to Section 6 hereof, will be conclusive, and such
interpretation and construction will be binding upon all those who hold or are
eligible to receive Options under the Plan. The Board may from time to time
adopt rules and regulations for carrying out this Plan and, subject to the
provisions of this Plan, may prescribe the form of the instruments evidencing
any Option granted under this Plan. Subject to the provisions of this Plan, the
Board will have full and final authority in its discretion to select the
employees to be granted Options, to authorize granting such Options and to
determine the number of shares to be subject thereto, the exercise prices, the
terms of exercise, expiration dates and other pertinent provisions thereof.
8 Amendment and Termination. The Board may alter, amend, suspend or terminate
this Plan, provided that no such action will deprive any of the Optionee's
rights under an Option without the Optionee's consent. Except as herein
provided, no such action of the Board, unless taken with the approval of the
stockholders of the Company, may:
(i) increase the maximum number of shares for which Options
granted under this Plan may be exercised;
(ii) alter the class of employees eligible to receive Options under
the Plan; or
(iii) amend the Plan in any other manner which the Board, in its
discretion, determines should become effective only if
approved by the stockholders even though such stockholder
approval is not expressly required by this Plan.
9 Financial Assistance. The Company is vested with authority under this Plan to
assist any employee to whom an Option is granted hereunder (including any
director or officer of the Company or any of its subsidiaries who is also an
employee of the Company) in the payment of the purchase price payable on
exercise of that Option, by lending the amount of such purchase price to such
employee on such terms and at such rates of interest and upon such security (or
unsecured) as will have been authorized by or under authority of the Board.
10 Limitations of Rights of Optionees.
10.1 Certificates. A person to whom an Option is granted under this
Plan will not have any interest in the shares of Common Stock underlying the
Option, and will not have any of the rights or privileges of a shareholder with
respect to such shares, until the Option is exercised and the shares of Common
Stock are purchased.
10.2 No Violations. No shares of stock issuable under the Plan will be
issued and no certificate therefor delivered unless and until, in the opinion of
legal counsel for the Company, such securities may be issued and delivered
without causing the Company to be in violation of or to incur any liability
under any federal, state or other securities law, or any other requirement of
law or of any regulatory body having jurisdiction over the Company.
10.3 No Right to Employment. The receipt of an Option does not give the
Optionee any right to continued employment by the Company for any period, nor
will the granting of the Option
3
<PAGE>
or the issuance of shares on exercise thereof give the Company any right to the
continued services of the Optionee for any period.
10.4 Express Grant. Nothing contained in this Plan will constitute the
granting of an Option hereunder, which will occur only pursuant to express
authorization by the Board.
11 Company's Right of First Purchase. Until such time as the Company's Common
Stock is Publicly Traded (as defined in Section 13.1 herein), any shares of
Common Stock issued upon the exercise of any Option will be subject to the
Company's right of first purchase. By virtue of that right, (a) such shares of
Common Stock may not be transferred during the Optionee's lifetime to any person
other than members of the Optionee's Immediate Family (as defined in Section
13.2 herein), a partnership whose members are the Optionee and/or members of the
Optionee's Immediate Family, or a trust for the benefit of the Optionee and/or
members of the Optionee's Immediate Family, unless such transfer occurs within
the thirty (30) days immediately following either (i) the expiration of thirty
(30) days following written notice by the Optionee to the Company identifying
the prospective transferee and offering the Company the first opportunity to
purchase such stock at its Fair Market Value in cash, or (ii) the Company's
election to not purchase such shares of Common Stock after receipt of such
notice; and (b) upon the Optionee's death, the Company will have the right to
purchase all or some of such stock at its Fair Market Value within nine (9)
months after the date of death. This right of first purchase will continue to
apply to any such stock after the transfer during the Optionee's lifetime of
that stock to a member of the Optionee's Immediate Family or to a family
partnership or trust as aforesaid, and after any transfer of that stock with
respect to which the Company expressly waived its right of first purchase
without also waiving it as to any subsequent transfers thereof, but it will not
apply after a transfer of that stock with respect to which the Company was
offered but did not exercise or waive its right of first purchase or more than
nine months after the Optionee's death. The Company may assign all or any
portion of its right of first purchase to any one or more of its stockholders,
or to a pension or retirement plan or trust for employees of the Company, who
may then exercise the right so assigned.
12 Legends on Share Certificates.
12.1 For so long as the Common Stock is not Publicly Traded, in
addition to any other legends which may be prescribed by law, the following
legend (or substantially the following legend) will appear on each certificate
representing the Common Shares issued upon the exercise of each Option:
"The Securities represented by this Certificate have been
issued and are being held pursuant to the 1997 Incentive Stock
Option Plan of VCS Technologies, Inc., and may only be
transferred, sold or otherwise disposed of pursuant to the
terms thereof."
12.2 For so long as the Common Stock is not Publicy Traded, the
certificates representing the Common shares may, at the absolute discretion of
the Company, be subject to a stop transfer order, and bear the following or
substantially similar legend and such other legends as may be required by the
Company:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities laws and neither such
securities nor any interest therein may be offered, sold,
pledged, assigned or otherwise transferred unless (1) a
registration statement with respect thereto is effective under
the Act and any applicable state securities laws or (2) the
Company receives an opinion of counsel to the holder of such
securities, which counsel and opinion are reasonably
satisfactory to the Company, that such
4
<PAGE>
securities may be offered, sold, pledged, assigned or
transferred in the manner contemplated without an effective
registration statement under the Act or applicable state
securities laws."
13 Certain Definitions. In addition to the terms defined elsewhere in this
Plan, the following terms will have the following definitions:
13.1 Fair Market Value Defined. The "Fair Market Value" of corporate
stock will mean the price at which one could reasonably expect such stock to be
sold in an arm's length transaction, for cash, other than on an installment
basis, to a person not employed by, controlled by, in control of or under common
control with the issuer of such stock. Such Fair Market Value will be that which
has currently or most recently been determined for this purpose by the Board, or
at the sole discretion of the Board by an independent appraiser or appraisers
selected by the Board, in either case giving due consideration to recent
transactions involving shares of such stock, if any, the issuer's net worth,
prospective earning power and dividend-paying capacity, the goodwill of the
issuer's business, the issuer's industry position and its management, that
industry's economic outlook, the values of securities of issuers whose stock is
publicly traded and which are engaged in similar businesses, the effect of
transfer restrictions to which such stock may be subject under law and under the
applicable terms of any contract governing such stock, the absence of a public
market for such stock and such other matters as the Board or its appraiser or
appraisers deem pertinent. The determination by the Board or its appraiser or
appraisers of the Fair Market Value will, if not unreasonable, be conclusive and
binding notwithstanding the possibility that other persons might make a
different, and also reasonable, determination. If the Fair Market Value to be
used was thus fixed more than sixteen months prior to the day as of which Fair
Market Value is being determined, it will in any event be no less than the book
value of the stock being valued at the end of the most recent period for which
financial statements of the issuer are available.
13.2 Immediate Family. An individual's "Immediate Family" includes only
his or her spouse, parents or other ancestors, and children and other direct
descendants of that individual or of his or her spouse (including such ancestors
and descendants by adoption).
13.3 Publicly Traded. Corporate stock is "Publicly Traded" if stock of
that class is listed or admitted to unlisted trading privileges on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. ("NASD") or if sales or bid and offer quotations are reported for that
class of stock in the automated quotation system ("NASDAQ") operated by the
NASD.
5
<PAGE>
Incentive Stock Option Agreement ("Agreement") between VCS
Technologies, Inc., a Delaware Corporation (the "Company"), and the key employee
of the Company identified below in Section 1 (the "Optionee").
1 Summary of the Principal Terms of Grant:
GRANT DATE:
--------------
OPTIONEE:
--------------
NUMBER OF SHARES:
--------------
EXERCISE PRICE:
--------------
2 Purpose of Agreement. The Company, through its Board of Directors (the
"Board"), has determined that in order to attract and retain key personnel for
positions of substantial responsibility, to provide additional incentive to
employees of the Company and to promote the success of the Company's business,
it must offer key employees of the Company a chance to participate financially
in the success of the Company by developing an equity interest in the Company.
As a result, the Company adopted the VCS Technologies, Inc. 1997 Incentive Stock
Option Plan (the "Plan"), the terms and conditions of which are incorporated
herein by this reference. Capitalized terms not otherwise defined in this
Agreement shall have the same meaning as ascribed to them in the Plan. By this
Agreement, the Company and the Optionee desire to establish the terms upon which
the Company is willing to grant to the Optionee, and upon which the Optionee is
willing to accept from the Company an option to purchase shares of common stock
of the Company ("Common Stock").
3 Grant of Incentive Stock Option. Subject to the terms and conditions of this
Agreement and those contained in the Plan, the Company grants to the Optionee
the right and option (the "Option") to purchase from the Company all or any part
of an aggregate number of shares of Common Stock described in Section 1 above
(the Option Shares"). The Option granted hereunder shall be an Incentive Stock
Option, as defined in Section 422 of the Internal Revenue Code and as described
in the Plan.
4 Exercise Price. The price to be paid for the Option Shares (the "Exercise
Price") is as inserted in Section 1 above. The Exercise Price is not less than
the Fair Market Value of the Optioned Shares on the Grant Date, or, in the event
the Optionee, on the Grant Date, owns ten percent (10%) or more of the Common
Stock, as such amount is calculated under Section 422A(b)(6) of the internal
Revenue Code, as amended ("Code"), not less than one hundred and ten percent
(110%) of the Fair Market Value of the Optioned Shares.
5 Vesting of Option. Optionee's right to acquire the Option Shares pursuant to
the exercise of an Option will vest as to twenty-five percent (25%) of the
Option Shares on the first anniversary of this Agreement, and as to the
remaining seventy-five percent (75%) of the Option Shares, in equal monthly
increments over the thirty-six (36) month period after the first anniversary of
this Agreement. As provided in the Plan, the Board may waive the foregoing
vesting provisions in whole or in part at any time based on such factors as the
Board determines in its sole discretion.
6 Exercise of Option and Payment of Exercise Price. Subject to the terms and
conditions of this Agreement and those of the Plan, the Option may be exercised
by completing, signing and delivering to the Company a written notice ("Notice")
in the form attached hereto as Exhibit "A". The notice from Optionee shall be
accompanied by payment of the full Purchase Price of such Option Shares in cash
or by personal, cashier's or certified check.
1
<PAGE>
7 Termination of Option. Except as otherwise provided herein, the Option, to the
extent not exercised, will terminate upon the first to occur of the following:
(i) the date on which the Optionee ceases to be employed by the Company and
expiration of any applicable post-termination exercise periods provided by the
Plan; (ii) upon the anniversary of ten years from the Grant Date; or (iii) as
otherwise provided in the Plan.
8 Stock Certificates. The Company will deliver a certificate or certificates
representing any shares of Common Stock acquired upon the exercise of an Option
as soon as practicable after receipt of the Notice and payment. The certificates
for such shares will be registered in the name of the Optionee; if Optionee
requests in the Notice, the certificate will be registered in the name of the
Optionee and another person jointly, as joint tenants with right of
survivorship. If the Option is exercised by the legal representative of
Optionee's estate, or by any person or persons who acquires the Option directly
from Optionee as a result of Optionee's death, whether by bequest, inheritance,
or otherwise or pursuant to a qualified domestic relations order, the Notice
will be accompanied by appropriate proof of the right of such person or persons
to exercise the Option.
9 Company's Right of First Purchase. For so long as the Common Stock is not
Publicly Traded, any shares of Common Stock issued upon the exercise of an
Option will be subject to the Company's right of first purchase, all as
described in the Plan.
10 Legends on Share Certificates.
10.1 For so long as the Common Stock is not Publicly Traded, in
addition to any other legends which may be prescribed by law, the following
legend (or substantially the following legend) will appear on each certificate
representing the Common Shares issued upon the exercise of each Option:
"The Securities represented by this Certificate have been
issued and are being held pursuant to the 1997 Incentive Stock
Option Plan of VCS Technologies, Inc., and may only be
transferred, sold or otherwise disposed of pursuant to the
terms thereof."
10.2 For so long as the Common Stock is not Publicy Traded, the
certificates representing the Common shares may, at the absolute discretion of
the Company, be subject to a stop transfer order, and bear the following or
substantially similar legend and such other legends as may be required by the
Company:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities laws and neither such
securities nor any interest therein may be offered, sold,
pledged, assigned or otherwise transferred unless (1) a
registration statement with respect thereto is effective under
the Act and any applicable state securities laws or (2) the
Company receives an opinion of counsel to the holder of such
securities, which counsel and opinion are reasonably
satisfactory to the Company, that such securities may be
offered, sold, pledged, assigned or transferred in the manner
contemplated without an effective registration statement under
the Act or applicable state securities laws."
11 Taxes. Optionee agrees, no later than the date as of which the value of any
Option granted or shares acquired pursuant to this Agreement first becomes
includible in the gross income of the Optionee for federal income tax purposes,
to pay to the Company, or make arrangements satisfactory to the Company
regarding payment of, any federal, state or local taxes of any kind required by
law to be withheld with respect to the Option or such shares. The obligations of
the Company under this Agreement are conditioned on such payment or
arrangements, and the Company will, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to
Optionee.
2
<PAGE>
12 Nontransferability of Option. The Option is non-transferable otherwise than
by will or the laws of descent and distribution, or pursuant to a qualified
domestic relations order, and the Option may be exercised during the lifetime of
Optionee only by the Optionee.
13 Optionee Not a Shareholder; No Right to Employment. The Optionee is not, for
any purposes, a shareholder of the Company with respect to any of the Option
Shares until such time as the Option is exercised and the Option Share issued to
the Optionee. The receipt of an Option does not give the optionee any right to
continued employment by the Company for any period, nor will the granting of the
Option or the issuance of shares on exercise thereof give the Company any right
to the continued services of the optionee for any period
14 Disputes or Disagreements. As a condition of the granting of the Option
herein granted, the Optionee agrees, for himself and his personal
representatives, that any disputes or disagreement which may arise under or as a
result of or pursuant to this Agreement shall be determined by the Board in its
sole discretion, and that any interpretation by the Board of the terms of this
Agreement will be final, binding and conclusive.
15 Action Taken In Good Faith. No member of the Board, nor any officer or
employee of the Company acting on behalf of the Board will be personally liable
for any action, determination or interpretation taken or made in good faith with
respect to this Agreement.
16 Governing Law. This Agreement will be governed by and construed in accordance
with the laws of the State of New York.
17 Binding Effect. This Agreement is binding upon, and will inure to the benefit
of the parties hereto and their respective heirs, personal representatives,
successors and assigns.
IN WITNESS WHEREOF, the Company has caused this Option to be executed by its
duly authorized officer effective as of the Grant Date set forth in Section 1
above.
VCS Technologies, Inc.
By:
----------------------------------
William E. Wheaton, III
President
3
<PAGE>
EXHIBIT A
IRREVOCABLE NOTICE OF EXERCISE
VCS Technologies, Inc.
456 Glenbrook Road
Stamford, CT 06906
tel: (203) 327-3332
fax: (203) 327-3727
I hereby exercise my option(s), granted by VCS Technologies, Inc. (the
"Company"), to acquire shares of the common stock, $0.001 par value, of the
Company (the "Shares"), in accordance with the terms and conditions of the
Incentive Stock Option Agreement(s) described below and issued pursuant to the
VCS Technologies, Inc., 1997 Incentive Stock Option Plan.
<TABLE>
<CAPTION>
Number of Incentive
Stock Options Number of Nonqualified
Date of Grant Exercised Options Exercised Option Price
<S> <C> <C> <C> <C>
------------- ---------------- ------------------ ------------
------------- ---------------- ------------------ ------------
------------- ---------------- ------------------ ------------
</TABLE>
I intend to pay for such shares in the following manner:
/ / Enclosed cash or check in the amount of
$ in full payment for such shares.
--------------
/ / Cashless exercise (also attach Irrevocable Instructions to
Broker and Company)
/ / Other suitable form of payment:
-------------------------------
--------------------------------------------------------------
Dated this day of , 19 .
-------- ------------------------------------- ---
OPTIONEE:
-------------------------------
(Signature)
(Print Name)
4
<PAGE>
Independent Auditor's Consent
Exhibit 23.1
The Board of Directors
VCS Technologies, Inc.
We consent to the use of our qualified report included herein and to the
references to our firm under the headings "Selected Financial Data" and
"Experts" in the prospectus.
Our report dated August 15, 1995, contains an explanatory paragraph that states
that the Company has sustained recuring losses from operations, working capital
deficiency, and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. The consolidated financial
statements to do not include any adjustments that might result from the outcome
of that uncertainty.
KPMG Peat Marwick LLP
New York, New York
September 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 190,310
<SECURITIES> 0
<RECEIVABLES> 357,711
<ALLOWANCES> 0
<INVENTORY> 59,783
<CURRENT-ASSETS> 676,690
<PP&E> 457,541
<DEPRECIATION> 138,530
<TOTAL-ASSETS> 1,070,701
<CURRENT-LIABILITIES> 1,825,355
<BONDS> 0
0
0
<COMMON> 466
<OTHER-SE> (1,861,832)
<TOTAL-LIABILITY-AND-EQUITY> 1,070,701
<SALES> 740,458
<TOTAL-REVENUES> 740,458
<CGS> 468,591
<TOTAL-COSTS> 575,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,015
<INCOME-PRETAX> (443,757)
<INCOME-TAX> 0
<INCOME-CONTINUING> (443,757)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (443,757)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
</TABLE>
