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As filed with the Securities and Exchange Commission on March 22, 2000
REGISTRATION NO. 333-85479
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TRAINING DEVICES INTERNATIONAL, INC.
(Name of small business issuer in its charter)
COLORADO 3699 84-1294499
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
7367 S. REVERE PARKWAY, BLDG. #2-C
ENGLEWOOD, COLORADO 80112-3931
(303) 792-3792
(Address and telephone number of principal executive offices)
(Address of principal place of business or intended principal place of business)
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RONALD C. ELLINGTON
CHIEF EXECUTIVE OFFICER
TRAINING DEVICES INTERNATIONAL, INC.
7367 S. REVERE PARKWAY, BLDG. #2C
ENGLEWOOD, COLORADO 80112-3931
(303) 792-3792
(Name, address and telephone number of agent for service)
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COPIES TO
MARK R. LEVY, ESQ. W. CHRIS COLEMAN, ESQ.
HOLLAND & HART LLP MCAFEE & TAFT A PROFESSIONAL CORPORATION
555 17TH STREET, SUITE 3200 TWO LEADERSHIP SQUARE, 10TH FLOOR
DENVER, COLORADO 80202 OKLAHOMA CITY, OKLAHOMA 73102
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Approximate date of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, 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 of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, no par value per share 1,380,000 shares $8.00 $11,040,000 $2,914.56
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Representative's Warrants(3) 120,000 -0- -0- -0-
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Common Stock issuable upon exercise of 120,000 shares $9.60 $1,152,000 $304.13
Representative's Warrants(4)
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Total Registration Fee $3,218.69(5)
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</TABLE>
(1) Includes 180,000 shares issuable upon exercise of underwriters'
over-allotment option.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
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(3) No registration fee required pursuant to Rule 457(g) under the Securities
Act.
(4) Pursuant to Rule 416 under the Securities Act, there are also being
registered hereby such additional indeterminate number of shares as may
become issuable pursuant to the anti-dilution provisions of the
representative's warrants.
(5) Registrant previously paid for this registration statement a filing fee of
$7,061.20.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
2
<PAGE>
Subject to completion, dated March 22, 2000
1,200,000 SHARES
[LOGO]
TRAINING DEVICES INTERNATIONAL, INC.
COMMON STOCK
This is our initial public offering. We are offering 1,200,000 shares
of common stock. We currently estimate that the share price will be $6.00 to
$8.00.
We anticipate that the common stock will be listed on the Nasdaq
SmallCap Market under the symbol "____."
INVESTMENT IN OUR SHARES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price $7.00 $8,400,000
Underwriting discounts and commissions $____ $_________
Proceeds before expenses to Training Devices International, Inc. $____ $_________
</TABLE>
Solely to cover any over-allotments, we have granted the representative
of the underwriters a 45-day option to purchase up to an additional 15% of the
shares of common stock sold in this offering on these same terms. This offering
is made on a firm commitment basis.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS A CRIME TO MAKE ANY REPRESENTATION TO
THE CONTRARY.
KASHNER DAVIDSON SECURITIES CORPORATION
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Prospectus dated ______________, 2000.
The information contained herein is not complete and may be changed. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold until the
registration statement is effective. This prospectus is not an offer to sell
these securities and we are not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
1
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[PICTURE OF FULL
FLIGHT SIMULATOR]
We intend to furnish our stockholders annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
2
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TRAINING DEVICES INTERNATIONAL, INC.
PROSPECTUS
INTRODUCTION
Please read this prospectus carefully. It describes our business, our
products and services and our finances. We have prepared this prospectus so that
you will have the information necessary to make an investment decision.
You should only rely on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of common stock.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary...................................4
Risk Factors.........................................8
Basis of Information in this Prospectus.............18
Forward-Looking Statements..........................18
Use of Proceeds.....................................18
Dividend Policy.....................................20
Capitalization......................................21
Dilution............................................24
Selected Financial Data.............................26
Management's Discussion and
Analysis of Financial Condition and
Results of Operations............................28
Business............................................33
Management..........................................57
Certain Transactions................................66
Principal Stockholders..............................68
Description of Capital Stock........................70
Shares Eligible for Future Sale.....................73
Underwriting........................................75
Legal Matters.......................................79
Experts.............................................79
Where You Can Find More
Information......................................79
Index to Financial Statements......................F-1
Financial Statements of Training
Devices International, Inc......................F-2
</TABLE>
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION THAT WE PRESENT MORE FULLY
IN OTHER SECTIONS OF THIS PROSPECTUS. TO UNDERSTAND THIS OFFERING, YOU SHOULD
READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" AND
"FINANCIAL STATEMENTS OF TRAINING DEVICES INTERNATIONAL, INC." IN THIS
PROSPECTUS, WE USE THE TERM "SIMULATOR" TO REFER TO BOTH FULL FLIGHT SIMULATORS
AND FLIGHT TRAINING DEVICES.
THE COMPANY
We develop and manufacture technology-based full flight simulators and
flight training devices used in the training of commercial aviation pilots. We
are one of five companies in the world that manufacture full flight simulators
qualified by the Federal Aviation Administration ("FAA") for use in the United
States. Since beginning our operations in 1996, we have designed, manufactured
and sold five simulators and modernized one existing simulator. These simulators
include a Boeing 767, an Airbus 320, a Korean regional jet, a Beechcraft 1900
turbo-propeller, and two TC-12 Navy trainers. In 1998, we were the first new
manufacturer in 13 years to receive Federal Aviation Administration
qualification of a full flight simulator.
Building on our manufacturing expertise, we intend to manufacture
simulators for use primarily for training centers owned by us or by us and
others in joint arrangements. Our plan is to manufacture simulators of selected
types of airplanes used by the regional airlines, including regional jets.
According to the Regional Airline Association, regional airlines in the United
States provide short-haul scheduled passenger and freight service using
turbo-prop and small turbofan (i.e. jet) powered airplanes connecting small- and
medium-sized communities with larger cities and hub airports. There are
approximately 95 regional airlines in the United States, including Air Wisconsin
Airlines, Atlantic Coast Airlines, Atlantic Southeast Airlines, CommutAir, Mesa
Airlines and Sky West Airlines.
We are currently building two Beech 1900 full flight simulators. The
Beech 1900 is a nineteen seat turbo-prop and, in terms of number of aircraft, is
currently one of the largest single airplane types used by the regional
airlines. In addition to the Beech 1900, we intend to develop simulators for
popular regional aircraft. These include the Dornier 328 turbo-prop and the
Bombardier CRJ, the Embraer ERJ and the Dornier 328 jets. These jets are being
added to fleets for new routes given to regional airlines by major carriers.
We have two studies, one of which is internal, projecting a shortage of
simulators relative to the demand for simulators. The studies are based on a
number
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of assumptions. See "Business -- Market Overview Demand Exceeding Supply" at
page 37.
We will administer and maintain our training centers, and we will offer
fractional ownership interests in simulators at these centers to regional
airlines under a program called "NEXUSim." A fractional, undivided ownership
interest in a simulator will permit an airline to use a specific number of pilot
training hours per year. The airline will realize a lower up-front cost when
compared to buying a simulator and lower hourly rates for training its pilots as
compared to training in an airplane or training at a third-party training
center. Instead of selling all or some of the fractional interests, we may sell
a simulator, or interests in a simulator, to a leasing company, leaseback the
simulator and contract with airlines for their use of the simulator at one of
our training centers on an hourly basis.
Initially, we intend to open two training centers located strategically
in the United States to service customers for our simulators. The first training
center will be located on a community college campus in Greeley, Colorado. We
may, in addition to or instead of opening a new training center, acquire
existing simulators or pilot training businesses.
We anticipate revenues from the sale of fractional interests, and from
any sale-leaseback of a simulator with a leasing company, as well as from
monthly fees for operating simulators and maintaining the centers. These
revenues are intended to provide us a return of development and manufacturing
costs for the simulators, cash flow to make additional simulators, and possibly
funds to acquire pilot training companies.
Three of our senior executive officers each have over 25 years of
experience in designing, engineering and manufacturing simulators.
We were incorporated in Colorado in January, 1995. Our executive
offices are located at 7367 South Revere Parkway, Building #2-C, Englewood,
Colorado 80112. Our telephone number is (303) 792-3792. Our Website address is
www.tdisim.com.
THE OFFERING
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<S> <C>
Common Stock offered by us........................... 1,200,000 shares
Common Stock to be outstanding after the
offering............................................. 2,736,704 shares (estimated through
May 12, 2000)
Use of proceeds...................................... To repay 14% notes in the principal
amount of $60,000 and accrued
interest; to fund the development
and manufacture of simulators for the
NEXUSim program and our proposed
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initial training centers; to fund
other corporate purposes, including
overhead, operating losses and possibly
complementary acquisitions of existing
simulators or businesses with simulators
for training pilots.
</TABLE>
Proposed Nasdaq SmallCap Market symbol..... _____
The number of shares of common stock to be outstanding after this
offering does not include shares we have either agreed to issue or reserved for
issuance under our stock option plans and under our outstanding warrants. For
more information, please read the "Capitalization" section on page 21.
Unless the context requires otherwise, "TDI," "we," "us" and "our" in
this prospectus refer to Training Devices International, Inc.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes financial data for our business. In
addition to this information, please read "Financial Statements of Training
Devices International, Inc." starting on page F-1 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on page 28.
<TABLE>
<CAPTION>
YEAR ENDED
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DECEMBER 31, DECEMBER 31,
1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................... $1,498 1,029
Cost of sales.................... 2,228 1,419
Gross margin (loss).............. (730) (390)
Selling, General and
Administrative............... 832 1,287
Loss from operations............. (1,562) (1,677)
Interest expense (income), net 10 589
Other expense.................... 66 125
Net loss......................... (1,638) (2,391)
Basic net loss per share......... (1.29) (1.89)
Weighted average number
of common shares outstanding. 1,267 1,268
Pro forma net loss per
share............................ (1.35)
</TABLE>
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The pro forma net loss per share as of December 31, 1999, reflects the
conversion of $830,000 of 14% Notes plus accrued interest into 268,216 shares of
common stock. At the time these Notes are converted, the deferred debt issuance
costs related to this financing will be fully amortized. The debt reflected in
the financial statements will be increased to the outstanding principal amount
of $830,000 and then converted into common stock. Additionally, $653,810 of
expense has been reflected in the pro forma net loss per share for the fair
value of the common stock issued in the conversion over the face value of the
Notes and related accrued interest.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
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PRO FORMA
ACTUAL AS ADJUSTED
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(In thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Cash 96 6,831
Working capital (deficit) (2,155) 5,110
Total assets 1,407 7,808
Total stockholders' equity (deficit) (2,274) 5,036
</TABLE>
The Pro Forma As Adjusted column reflects our receipt of the estimated
net proceeds from the sale of 1,200,000 shares of common stock at an assumed
initial public offering price of $7.00 per share, after deducting underwriting
discounts and other estimated offering expenses, and reflects subsequent
repayment of 14% debt financing with a principal balance totaling $60,000 and
accrued interest, along with the conversion of $830,000 bridge debt and accrued
interest into 268,216 shares of common stock at the closing of this offering.
7
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE YOU DECIDE TO BUY OUR COMMON
STOCK. THE RISKS AND UNCERTAINTIES WE DESCRIBE BELOW ARE NOT THE ONLY RISKS WE
FACE. YOU SHOULD CONSIDER ALL OF THESE RISK FACTORS ALONG WITH THE OTHER
INFORMATION CONTAINED IN THE DOCUMENTS TO WHICH WE HAVE REFERRED YOU.
IF ANY OF THE ADVERSE EVENTS DESCRIBED IN THE FOLLOWING RISK FACTORS
ACTUALLY OCCUR OR WE DO NOT ACCOMPLISH NECESSARY EVENTS DESCRIBED IN THE RISK
FACTORS, OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS COULD BE
MATERIALLY AND ADVERSELY AFFECTED, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
WE NEED ADDITIONAL THIRD-PARTY FINANCING IN OR PRIOR TO 2001 IN ORDER TO
CONTINUE OUR BUSINESS PLAN.
We estimate that our cash needs for the period June 1, 2000 through
June 30, 2001 are approximately $13,500,000 for the payment of ongoing
manufacturing costs for two simulators, overhead costs, sales and marketing
expenses, general and administrative expenses and interest on and repayment of
borrowings. We believe that the proceeds of this offering, together with the
sale of fractional ownership shares in simulators and recurring revenue from two
training centers which we start, will provide sufficient funds for our
operations through at least June 30, 2001. In the interim, we will also be
relying on advances under two loan agreements that are in place and are to be
repaid prior to June 30, 2001.
We are currently manufacturing two simulators under our fractional
ownership program. One simulator is to be complete in the fourth quarter of
2000, and we have scheduled completion of the second simulator in March, 2001.
We plan to sell fractional ownership interests in both simulators. After
repayment of related loans, the funds generated from these sales are not
sufficient to manufacture additional simulators under our program. Thus, we
expect to require additional financing, and for this purpose we may seek either
private or public equity or debt financing from third parties. We might be
required to seek financing at an earlier time if the Company consummates
acquisitions or joint ventures that require capital.
We do not know whether financing will be available or whether the terms
of any available financing would be burdensome. Any failure to raise sufficient
funds when needed or to obtain reasonable terms may require us to significantly
curtail our business plans or cease operations. Any material change in our
business plan could affect our growth, ability to compete and our ability to
service existing debt. Without
8
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external financing for manufacturing additional simulators, our activities could
be limited to operating two simulators in our initial training centers.
We must expend manufacturing costs for simulators used in the NEXUSim
program before we sell any fractional ownership interests or sell simulators to
a leasing company. Manufacturing a simulator can take 14 to 24 months, or longer
if we experience a delay. We will not receive payment from proposed customers or
a leasing company in the NEXUSim program until we receive FAA qualification of a
simulator. Thus our costs of manufacturing and any costs resulting from a delay
in the completion of a simulator must at this time come from an external source
of financing.
In order to meet our debt service and obligations based upon our
proposed manufacturing schedule through June 30, 2001, we must sell at least 12
fractional ownerships in two simulators by May, 2001. We intend to sell six of
seven fractional interests in each simulator.
WE HAVE EXPERIENCED LOSSES AND NEGATIVE CASH FLOW SINCE WE BEGAN OUR OPERATIONS,
IF THESE TRENDS CONTINUE, WE WILL NOT HAVE ENOUGH CAPITAL TO OPERATE OUR
BUSINESS OR COMPLETE OUR BUSINESS PLAN.
We have experienced a net loss of $453,803, $1,637,939, $2,391,210 for
the 1997, 1998 and 1999 years, respectively. We had a negative net worth of
$2,274,187 at December 31, 1999. Among other things, the volume of products we
have manufactured and sold have not been sufficient to cover our fixed and
variable costs. If we continue to experience losses and negative cash flow, we
will not have enough capital to operate our business or complete our business
plan.
We expect to have a net loss and negative cash flow in the 2000 year
and might also experience a negative cash flow in the year 2001 depending
upon the level of our activities. We plan to use the proceeds of this
offering in manufacturing simulators for our fractional ownership program and
to fund these losses in 2000 and part of 2001. Because customers will not
acquire interests in a simulator until either shortly before or after the FAA
qualifies the simulator, we will not receive any revenue from the sale of
fractional ownership interests until the fourth quarter of 2000 and it could
be later.
In order to avoid ongoing losses and negative cash flow in the future,
we must:
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- Complete each full flight simulator within the specified 14-24
month time schedule;
- Sell the completed full flight simulator or right to use
immediately upon completion of manufacturing; and
- Not experience any material increases in cost of manufacture.
- Not experience any material delay in obtaining FAA
qualification of a simulator.
NO BINDING CONTRACTS EXIST FOR OUR SALE OF FRACTIONAL OWNERSHIP INTERESTS IN THE
SIMULATORS WE PLAN TO BUILD IN YEAR 2000 AND LATER.
Although we have obtained some letters of interest regarding fractional
ownership interests in simulators, we cannot assure you that anyone will
purchase fractional ownership interests in our simulators. If all of the
fractional ownership interests in a simulator are not sold or leased, we will
need to:
- contract with third parties to use the simulator in our
training center for those time periods corresponding to unsold
fractional ownership interests, or
- find a third-party buyer for the entire simulator.
Not selling a fractional ownership interest or not engaging in the
alternative of a sale-leaseback transaction with a leasing company would affect
our liquidity. In such a case, we would have to recover our manufacturing costs
over an extended period of time through monthly invoicing of hourly fees for
operation of the training center, and we could run out of funds or be required
to slow the manufacture of other products. We could seek further external
financing; however, we do not know whether financing would be available or
whether the terms of any available financing would be burdensome. Accordingly,
our inability to sell a fractional ownership interest in a simulator or to
engage in a sale-leaseback transaction for a simulator would decrease our
overall revenues, operating results and cash flow, which could affect our
ability to survive.
WE HAVE NOT MADE ARRANGEMENTS FOR OUR SELLING ANY SIMULATOR TO A LEASING COMPANY
AND THEN OUR LEASING BACK THE SIMULATOR. IF A SALE-LEASEBACK TRANSACTION IS
COMPLETED, IT WILL DECREASE OUR CASH FLOW AT THE TIME OF THE TRANSACTION WHEN
COMPARED TO A SALE TO CUSTOMERS.
We have talked informally with a leasing company, but we can give no
assurance that a sale-leaseback transaction could be completed. We also do not
know the terms that a leasing company might require or the amount that the
leasing company would pay us for the simulator.
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The purpose of the sale-leaseback is to provide us with a return of as
much as possible of our manufacturing cost for the simulator. We expect that any
sale of a simulator to a leasing company, followed by a leaseback of the
simulator to us, would result in our receiving a discount of the sales price
that we would otherwise charge for the simulator to customers which use the
simulator. The leasing company will include discounts for the use of money
invested in the simulator and the risk of realizing a return on the investment.
The amount that we receive in the sale-leaseback may or may not be the cost of
manufacturing the simulator. We would receive later additional cash from any
contracts with customers for the use of that simulator. If our customers request
contracts for the use of the simulator, rather than purchases of fractional
interest, on more than a few occasions, it could materially and adversely affect
our cash flow and business plan.
OUR SIMULATOR FRACTIONAL OWNERSHIP PROGRAM MAY REQUIRE US TO REPURCHASE THE
FRACTIONAL OWNERSHIP INTEREST IN SOME SIMULATORS.
Our fractional ownership program for simulators of turbo-propeller
airplanes may include an agreement by us to repurchase the interest of a
customer in a simulator after three years at the customer's request, upon four
months' notice. The repurchase will be at a price equal to the then fair market
value of the simulator. This agreement represents a contingent liability. To
meet this obligation, we must either:
- have sufficient cash readily available,
- obtain financing for the repurchase, or
- be able to locate a buyer for the interest being repurchased.
A default under one or more repurchase obligations could result in a bankruptcy
or otherwise undermine our credibility.
WE DO NOT HAVE A BACKLOG OF CONTRACTS.
In businesses manufacturing simulators or other equipment requiring
significant capital expenditures of the customers, firm contracts in hand for
the equipment are a means to assure ongoing manufacturing activities and sales
of the products. Our NEXUSim program involves building a simulator without a
firm contract, and accordingly we can expect to have little or no backlog of
contracts.
OUR PROPOSED EXPANSION INTO HIGHER PRODUCTION VOLUMES OF SIMULATORS AND INTO
TRAINING CENTERS IS UNPROVEN AND EVOLVING.
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If our plans for the NEXUSim program or training centers are not
successful for any reason, we may have to change all or parts of our plans for
future operations. As an example, we might own a simulator placed into a
training center established by us. Any changes could delay our sales of
simulators or our operation of training centers, with the possibility of
continuing losses and negative cash flow.
OUR MANAGEMENT DOES NOT HAVE EXPERIENCE ESTABLISHING OR ADMINISTERING TRAINING
CENTERS FOR COMMERCIAL PILOTS.
We may experience unexpected developments while trying to enter the
business of operating and maintaining training centers for pilots. A key factor
in our success will be our ability to hire people with experience regarding
these types of training centers.
We do not have an established reputation with regard to training
centers and may be at a competitive disadvantage as a result.
ANY DELAYS IN MANUFACTURING A SIMULATOR WILL ADVERSELY AFFECT OUR BUSINESS, CASH
FLOW, FINANCIAL CONDITION AND OPERATING RESULTS.
Manufacturing delays will cause sales of our products and payments to
us to be delayed. If a manufacturing delay occurs, we would continue to have
ongoing manufacturing and overhead costs and would incur higher overall costs
for the simulator. Manufacturing delays could also affect the willingness of any
actual or proposed customer to purchase or use a simulator, could delay the
establishment and operation of a training center and could affect our
credibility in the industry.
Manufacturing delays could result from a variety of reasons, including:
- Delays for any reason by a supplier to provide components for
a simulator. If we switch suppliers in the course of
manufacturing a product, it could take an additional five or
more months to bring the new supplier into our manufacturing
process and to get the parts we need for a particular
simulator.
- Quality or other issues arising during the manufacturing
process.
- Our inability to receive a complete set of data from the
airplane manufacturer or a third-party supplier about the
physical configuration and flight characteristics of an
airplane being simulated.
- Failure to obtain FAA qualification of a simulator.
Other risk factors described in this "Risk Factors" section could also
cause manufacturing delays.
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IF THE NEXUSIM PROGRAM CUSTOMERS CANNOT ARRANGE FINANCING TO PURCHASE FRACTIONAL
OWNERSHIP INTERESTS IN A SIMULATOR, OUR BUSINESS MAY NOT BE SUCCESSFUL.
We do not expect most of our customers to have sufficient cash, or to
want to use their available cash, to buy a fractional ownership interest in a
simulator. As a result, the customers will need to arrange for financing the
purchase. Some customers, such as small regional airlines, may have difficulty
obtaining a financing because of their credit rating or lack of collateral.
We also are not certain whether the features and terms of the NEXUSim
program are satisfactory for a potential lender to provide financing of a
customer's purchase of a fractional ownership interest in a simulator. In
informal contacts, a few potential lenders have indicated financing for
customers may be possible, but a proposed lender would need to consider both the
specific terms of the NEXUSim program and information on the customer. If
necessary, we might revise our NEXUSim program in an attempt to make financing
options available for our potential customers.
WE HAVE NEVER MANUFACTURED MORE THAN THREE SIMULATORS AT THE SAME TIME. OUR
PROPOSED EXPANSION OF MANUFACTURING REQUIRES COORDINATION AND INTEGRATION OF OUR
WORK FLOW PROCESS, FINANCIAL AND INFORMATION MANAGEMENT SYSTEMS AND NEW AND
EXISTING EMPLOYEES.
This type of expansion also places a substantial burden on our
management and financial controls. As part of our expansion, we plan to
manufacture up to five simulators at the same time. We anticipate that our
full-time employees will grow from 29 up to approximately 60 over the next three
years. Unless we modify and integrate our processes and systems successfully, we
could experience higher costs, delays and quality or other problems in
manufacturing the simulators, and we might not be able to have in process at the
same time enough simulators to be profitable.
OUR BUSINESS DEPENDS ON OUR REPUTATION WITHIN A SMALL GROUP OF POTENTIAL
CUSTOMERS.
We expect our customers for simulators and pilot training centers,
whether through the NEXUSim program or the outright sale of a simulator to one
customer, to be limited to approximately 95 regional airlines in North America
and other parties in commercial aviation. Our reputation with, and ability to
sell to, this small group could be affected by dealings with, or performance
for, any one customer.
In the past, we have worked with, and will in the future work with, a
few customers for the outright purchase of an entire simulator. The potential
customer base for the NEXUSim program will also be relatively small. We will
sell up to six
13
<PAGE>
fractional shares in a simulator, and we expect that any contracts for use of a
simulator will also be with two to six customers. The loss of even one
existing or proposed customer could have a material, negative impact on our
business.
WE HAVE NO LONG-TERM CONTRACTS WITH SUPPLIERS, AND WE CANNOT BUILD SIMULATORS IF
A SUPPLIER DOES NOT PROVIDE THE PARTS WE NEED.
Our ability to build simulators depends on us having the necessary
parts and equipment for the simulator we are building. Because we do not have a
long-term contract with any suppliers, a supplier may decline to deal with us
any time during the course of building a simulator. Suppliers can also change
prices for parts used in our simulators and may assert more control over the
delivery time for parts. If we obtain a component for simulators from different
suppliers, we may experience some differences in the component that could
require adjustments in our manufacturing process and could increase our costs.
THE LOSS OF ANY KEY PERSONNEL COULD HARM US AND OUR BUSINESS. WE ALSO MUST BE
ABLE TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL.
We believe that our success depends upon the continued services of our
senior management team, particularly Ronald C. Ellington (the Chief Executive
Officer), Bruce Betschart (a founder and Chief Operating Officer), Robert E.
Sawyer, Jr. (a founder and Vice President-Engineering), and Charles Douglas
(Vice President-Operations). Experienced management personnel with a background
in, and knowledge about, flight simulators are difficult to hire. We have no key
man life insurance at this time for our management, although we may endeavor to
purchase this type of insurance regarding these four individuals. The loss of
the services of any senior management member or other key employees with
extensive knowledge in the aviation and flight simulator area could adversely
affect our operations and thereby our financial condition and operating results.
Our manufacturing process requires technicians and engineers and is not
a simple assembly process, but rather a complex integration of components and
software. Maintenance of simulators is also a skilled position. Our expansion
depends on our ability to identify, attract, hire, train, retain and motivate
highly skilled technical, managerial, sales and marketing personnel. Competition
for this type of personnel is intense, and we may not be able to hire or retain
sufficient qualified personnel. Any delay in filling these positions could
adversely impact our manufacturing schedule, revenues and cash flow.
14
<PAGE>
WE DO NOT HAVE WIDESPREAD NAME RECOGNITION, WHILE OUR COMPETITORS ARE
ESTABLISHED AND WELL-KNOWN, AND HAVE SIGNIFICANT ADVANTAGES IN OUR INDUSTRY.
We are a relatively new simulator manufacturer, and we are a small
company with little name recognition. Airlines and other customers in the
commercial aviation industry rely on name recognition and past experience when
deciding whether a supplier can provide products in a reliable and timely
manner. Our size, limited experience and lack of name recognition are
disadvantages, and our business may not be successful.
Our principal competitors make most of the simulators used in North
America. They are significantly larger than us, have established reputations,
and have more financing, personnel and technological and marketing resources.
Competitors may be able to charge lower prices for simulators or training
services because of their greater resources and size. One of the competitors,
FlightSafety International, Inc., may have long-term contracts with some
regional airlines for the use of training centers, and these long-term contracts
could interfere with our ability to sell fractional ownership interests in a
simulator to a regional airline.
A DECREASE IN THE DEMAND FOR SIMULATORS CAUSED BY AN INCREASED SUPPLY COULD
LIMIT OR ELIMINATE OUR POTENTIAL SHARE OF THE MARKET.
We believe that the demand for simulators for airplanes of regional
airlines currently exceeds the supply and that this trend will continue for the
next several years. If our competitors increase their supply of simulators for
specific airplanes used by regional airlines, the demand for our simulators
could materially decrease, limiting or eliminating our potential share of the
simulator market. Any decrease in our proposed sales of simulators or our
proposed contracts with customers for the use of simulators would materially and
adversely affect our business.
Any economic or other events (such as a fuel shortage or high prices
for fuel) could cause a slow-down in the use of commercial airplanes, including
the number of passengers flying on regional airlines. Such an event could limit
or eliminate the demand for our simulators and for our pilot training centers.
TECHNOLOGICAL CHANGES IN OUR INDUSTRY COULD AFFECT THE PRICE COMPETITIVENESS OF
OUR PRODUCTS AND SOFTWARE.
Our products and the software used in them are technologically
advanced. We spend little on research and development. Instead, we buy our major
components from established third-party suppliers. If we fail because of limited
resources or otherwise to respond to technological developments and enhancements
in our software, product integration and training services, our business could
be adversely affected.
15
<PAGE>
The components purchased by us for integration into simulators may be
affected by technological changes. If we could not purchase components with
technological changes or improvements from our existing suppliers or new
suppliers, we could experience a material and adverse effect on our ability to
compete.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATE AND
WE COULD LOSE OUR COMPETITIVE ADVANTAGE.
Our products and techniques are not trademarked or patented. We rely
upon copyrights, common law rights on names and marks, trade secret protection
and a single-use license with our customers with regard to our proprietary
technology, including the sophisticated software used in our simulators. We also
have confidentiality agreements with our employees. These protective measures
may not be adequate to protect our proprietary rights, and we may not be able to
prevent others from using our technology to their own benefit. We also may not
be able to prevent others from claiming violations by us of their proprietary
rights.
Ultimately, our bringing or defending a legal action may be necessary
to enforce or protect our proprietary rights. However, we may not have
sufficient capital to bear the cost of that type of legal proceeding, which can
be high.
A CHANGE IN GOVERNMENT REGULATIONS COULD INCREASE OUR COST OF DOING BUSINESS OR
CAUSE US TO CHANGE THE WAY WE CONDUCT OUR BUSINESS.
The FAA has requirements concerning simulators and the use of
simulators. The FAA also regulates training centers for commercial pilots. A
change in FAA regulations could impose additional burdens on us and our
competitors and limit our ability to serve our customers.
THE FUTURE SALE OF SHARES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
THE STOCK PRICE TO FALL AND DECREASE THE VALUE OF AN INVESTMENT IN OUR COMMON
STOCK.
Our present shareholders have approximately _______ shares of common
stock that may be freely sold on the public market upon completion of this
offering, approximately _______ shares that are freely transferable after one
year and approximately _______ shares that are freely transferable after two
years. The trading in our stock may involve relatively low volume because of the
limited number of shares in the public float, and any sales of a substantial
number of shares could cause a decrease in the market price of our common stock
or result in a relatively low price for our common stock over a period of time.
Upon closing of this offering, some stock and warrant holders are
entitled to certain registration rights. The exercise of those registration
rights could adversely
16
<PAGE>
affect the market price of our common stock because investors may view the
registered shares as a supply of shares overhanging the market.
CERTAIN PROVISIONS IN OUR CORPORATE DOCUMENTS MAY DISCOURAGE AN ACQUISITION BY
OTHERS AND DEPRESS THE PRICE OF OUR STOCK.
Some of the provisions in our corporate documents could make it more
difficult for a third party to acquire us, even if a change in control would
benefit the stockholders. These provisions include a two-thirds vote of
shareholders for a merger or a sale of substantially all of our assets, the
staggered election of directors for three-year terms, the requirement that
directors can only be removed for cause and the availability of a large number
of authorized but unissued shares of common and preferred stock.
These provisions may discourage, delay or prevent a change in control
or a change in our management. The provisions could also limit the price that a
potential investor might be willing to pay for our common stock.
17
<PAGE>
BASIS OF INFORMATION IN THIS PROSPECTUS
Unless otherwise indicated, all information in this prospectus:
- has been adjusted to reflect a 3 to 1 reverse stock split
effected on September 7, 1999; and
- assumes that the underwriters do not exercise their
over-allotment option or their warrants and that no other
person exercises any other outstanding option or warrant.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements that
involve risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "believes," "expects," "estimates," "anticipates,"
"intends," "plans" and similar expressions. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of various factors, including all the risk discussed in "Risk Factors" and
elsewhere in this prospectus.
USE OF PROCEEDS
We estimate that, after deducting underwriting discounts and
commissions, a non-accountable expense allowance of the underwriters, and the
estimated offering expenses (excluding amounts previously paid by us), we will
receive net proceeds from this offering of approximately $6,927,841 or
$8,024,041 if the underwriters exercise their over-allotment option in full.
Each of these amounts is based upon an assumed initial public offering price of
$7.00 per share.
We intend to use the estimated net proceeds for the following purposes:
- To repay 14% notes in the principal amount of $60,000 and
accrued interest;
- Fund the development and manufacture of simulators; and
- Fund other general corporate purposes and working capital,
including the payment of selling, general and administrative
expenses, the payment of current liabilities, and possibly
complementary acquisitions of existing simulators or
businesses with simulators for training pilots.
18
<PAGE>
The indebtedness which we are paying from proceeds of this offering is
described below.
In a transaction on August 17, 1999, in order to provide additional
capital to TDI, two officers (Mr. Betschart and Mr. Sawyer) invested a total of
$60,000 in the Company and received notes for that amount and warrants to
purchase 6,000 shares of our common stock. The notes bear interest at the rate
of 14% per annum and have a maturity date of the earlier of (1) May 31, 2000 or
(2) the completion of this offering. The notes also include the requirement for
an additional cash payment to the holders of notes of $1,000 per year per
$10,000 of notes for five years, beginning June 1, 2000, with the first payment
to be made on May 31, 2001 even after the notes are paid in full. The warrants
have an exercise price of $0.75 per share. These warrants contain a cashless
exercise provision which allows a warrant holder to convert the warrant into a
number of shares equal to the exercise price multiplied by the number of shares
underlying the warrants covered by the conversion, divided by the current market
price. The number of shares and purchase price under the warrants are subject to
adjustments under anti-dilution provisions. Warrant holders also have rights to
join in certain registrations of TDI shares by us.
The cost of manufacturing in the NEXUSim program the first two
simulators, which simulate the Beech 1900 airplane, is approximately
$8,000,000 and will be incurred primarily in 2000. The estimated
manufacturing costs include allocable plant overhead, but do not include
selling, general and administrative costs.
We expect that any net proceeds of this offering will provide
sufficient funds for these purposes through June of 2001. After that time, we
expect to require additional financing. However, if our plans and assumptions
change or prove to be inaccurate, or if we consummate an acquisition or joint
venture, we may be required to seek additional capital sooner than currently
anticipated. Sources of financing may include public or private debt or equity
financing by us, vendor financing or other financing arrangements. This
financing may not be available or may not be available on terms acceptable to
us. The issuance of additional equity securities could cause substantial
dilution of your interest in us.
We evaluate from time to time potential acquisitions of, or joint
ventures relating to, training centers with simulators. If we enter into an
agreement with respect to an acquisition or joint venture of this nature, it
could require further additional financing, and we may elect to use a portion of
the proceeds of this offering for that purpose.
We currently have no understandings, commitments or agreements for any
material acquisition of a business or investment in a business.
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<PAGE>
Pending use of the net proceeds of this offering, we intend to invest
the net proceeds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
We currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
1999. Our capitalization is presented:
(1) On an actual basis; and
(2) On a pro forma as adjusted basis to reflect the receipt of the
estimated net proceeds from the sale of 1,200,000 shares of common stock at an
assumed initial public offering price of $7.00 per share, after deducting
underwriting discounts and estimated offering expenses, and to reflect
subsequent repayment of 14% debt financing with a principal balance totaling
$60,000 at the date of initial public offering, and to reflect the conversion
of the remaining $830,000 and accrued interest of 14% debt financing into
268,216 shares of common stock.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------
PRO FORMA
ACTUAL ADJUSTED
------ --------
<S> <C> <C>
Cash and cash equivalents..................................... $96,437 $6,830,522
=========== ============
14% bridge loan and accrued interest converted
upon completion of this offering(1)..................... $545,040 $ -
Additional 14% debt financing and accrued
interest due upon completion of this offering........... 39,401 -
10% convertible notes, due January 2, 2001,
payable to related parties.............................. 120,000 120,000
Bridge loan incentive obligation 114,468 7,717
Note payable to Aims 526,000 526,000
Preferred stock, no par value per share;
10,000,000 shares authorized; no shares
issued, actual and pro forma as adjusted................ - -
Common stock and additional paid in capital, no
par value per share, 20,000,000 shares
authorized, 1,268,488 shares issued and
outstanding, actual; and (SEE BELOW) shares
issued and outstanding pro forma as adjusted ........... 4,054,722 12,665,318
Accumulated deficit........................................... (6,261,713) (7,562,353)
----------- ------------
Total capitalization.......................................... $(862,082) $ 5,756,682
=========== ============
Shares of Common Stock 1,268,488 2,736,704
=========== ============
</TABLE>
(1) According to agreements with each holder of notes in this bridge loan,
the principal and accrued interest on the notes are automatically
converted into
21
<PAGE>
shares of our common stock on the closing of this offering. The
conversion price is 50% of the public offering price in this offering.
We expect there to be 2,736,704 shares of common stock outstanding
after this initial public offering (estimated at May 12, 2000 to take into
account principal and accrued interest of the bridge debt being converted into
shares). In addition to the shares outstanding after the offering, we may issue
additional shares of common stock under the following plans and arrangements:
- 327,277 shares issuable upon the exercise of stock options
outstanding under the 1997 Incentive and Nonstatutory Stock
Option Plan, as amended, at a weighted average exercise price
of $3.36 per share, including 100,000 shares issuable upon
exercise of an option held by a former director of ours;
- 274,000 shares issuable upon the exercise of stock options
under our 1999 Stock Option Plan at a weighted average price
of $5.12 per share;
- 126,000 additional shares which have been reserved for
issuance under our 1999 Stock Option Plan;
- 26,666 shares issuable upon the conversion of one outstanding
unsecured convertible promissory note, in the principal
amount of $100,000, with interest paid at a fixed rate of 10%
per annum, a maturity date of January 2, 2001 and a conversion
rate of one share of common stock for each $3.75 of principal;
- 415,250 shares of common stock reserved for issuance under
outstanding warrants for common stock at a weighted average
exercise price of $5.93 per share; and
- 120,000 shares issuable upon the exercise of warrants being
granted to the underwriters in connection with this offering,
with an exercise price of 120% of the public offering price
for shares in this offering.
For information regarding significant indebtedness which we will have
outstanding after this offering, please see Notes 13 and 15 of Notes to
Financial Statements. This indebtedness includes the following:
- $1,520,000 in principal amount owed at December 31, 1999, to
Aims Community College Foundation in connection with a Beech
1900D full flight simulator being manufactured for a training
center in Greeley, Colorado at Aims Community College. We
received in April, 2000 an additional advance under this loan
which increased the principal amount to $2,020,000. This
indebtedness includes a provision for a transfer of
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<PAGE>
one fractional ownership share to Aims Community College. This
loan is secured by most of our assets and matures on December
1, 2000.
- A loan in the principal amount of $2,500,000 from an
individual, bearing interest at 12% per annum and payable on
February 1, 2001. This loan includes a provision for a loan
fee of $250,000 due on February 1, 2001 and an additional
$750,000 payable to the lender, commencing February 1, 2001,
in 60 equal monthly installments of $12,500. This loan is
secured by one of TDI's simulators and related accounts
receivables and other rights. This loan was not outstanding on
December 31, 1999.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $(2,712,244), or approximately $(2.14) per share. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total liabilities, divided by the number of shares of common stock
outstanding.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to the sale
of 1,200,000 shares of common stock offered at an assumed initial public
offering price of $7.00 per share, after the conversion of the principal and
accrued interest of bridge debt into 268,216 shares of common stock (which is an
estimate as of May 12, 2000), and after deducting the underwriting discounts and
estimated offering expenses payable by us, our pro forma net tangible book value
at December 31, 1999 would have been $4,258,593 or $1.56 per share. This
represents an immediate increase in pro forma net tangible book value of $3.70
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $5.44 per share to purchasers of common stock in this
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $7.00
Pro forma net tangible book value per share at December 31, 1999............. $(2.14)
Increase in pro forma net tangible book value per share attributable
to new investors........................................................ $3.70
Pro forma net tangible book value per share after this offering.............. $1.56
-----
Dilution in pro forma net tangible book value per share to new
investors............................................................... $5.44
=====
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1999, the differences between the number of shares of common stock purchased
from us, the total consideration paid and the average price per share by
existing holders of common stock and by the new investors at an assumed public
offering price of $7.00 per share, before deducting underwriting discounts and
other estimated offering expenses payable by us:
24
<PAGE>
<TABLE>
<CAPTION>
SHARES TOTAL AVERAGE
------ ----- -------
PURCHASED CONSIDERATION PRICE
--------- ------------- -----
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 1,268,488 46% $3,279,630 26% $2.59
--------- -- --------- -- ----
New investors................ 1,468,216 54% $9,338,755 74% $6.36
--------- -- --------- -- ----
Total............... 2,736,704 100% $12,618,385 100% $4.61
========= === =========== === ====
</TABLE>
All of the above computations assume no exercise of options or warrants
to purchase common stock, which options or warrants are either outstanding or
will be issued upon completion of this offering. Those options and warrants are
listed in the preceding section called "Capitalization." If any of those options
or warrants are exercised, new investors will suffer further dilution.
25
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data at and for each of the three
fiscal years in the period ended December 31, 1999 have been derived from our
financial statements which have been audited by Arthur Andersen LLP, independent
public accountants. The historical results of operations are not necessarily
indicative of the results which may be expected for any future period. The data
set forth below should be read together with the financial statements and notes
included elsewhere in this prospectus and also with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
DECEMBER 31, DECEMBER 31,
1998 1999
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................ $1,498 $1,029
Cost of sales........................... 2,228 1,419
Gross margin (loss)..................... (730) (390)
Selling, General and Administrative..... 832 1,287
Loss from operations.................... (1,562) (1,677)
Interest expense, net................... 10 589
Other expense........................... 66 125
Net loss................................ (1,638) (2,391)
Basic net loss per share................ $(1.29) $(1.89)
Weighted average number
of common shares outstanding........ 1,267 1,268
Pro forma net loss pershare............. $(1.35)
</TABLE>
The pro forma net loss per share as of December 31, 1999 reflects the
conversion of $830,000 of 14% Notes plus accrued interest into 268,216 shares of
common stock. At the time these Notes are converted, the deferred debt issuance
costs related to this financing will be fully amortized. The debt reflected in
the financial statements will be increased to the outstanding principal amount
of $830,000 and then converted into common stock. Additionally, $653,810 of
expense has been reflected in the pro forma net loss per share for the fair
value of the common stock issued in the conversion over the face value of the
Notes and related accrued interest.
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
(In thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Cash $96 $6,831
Working capital (deficit) (2,155) 5,110
Total assets 1,407 7,808
Total stockholders' equity (deficit) (2,274) 5,036
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We commenced operations in 1996, and in 1998 became the first new
manufacturer to receive FAA qualification of a full flight simulator in 13
years. We have spent three years enhancing our sophisticated modular software,
developing our manufacturing systems and training our manufacturing team. Since
inception we have raised total equity capital of approximately $3,000,000 (net
of offering costs of approximately $263,000) and had an accumulated deficit of
approximately $6,262,000 as of December 31, 1999.
We have experienced operating deficits for all years of operation due
to (a) a lack of sufficient capitalization, which impaired our ability to order
parts timely and extended our manufacturing time and costs; (b) insufficient
manufacturing volume to generate enough revenue to offset our overhead; and (c)
heavy non-recurring development costs (such as customizing software and
engineering) incurred in 1997 in the manufacturing of our first full flight
simulator.
We believe that our historical operating results are not indicative of
future performance for the following reasons, among others:
- The receipt of the proceeds of this offering, together with
loans from Aims Community College Foundation and a private
individual, will provide sufficient liquidity to fund the
manufacturing of our two initial simulators to be placed in
our own training centers through June 30, 2001;
- We are entering a new market segment (airline pilot training
centers);
- We have commenced the manufacturing of two Beech 1900D full
flight simulators for our initial training centers under our
NEXUSim program;
- Our proposed training centers are expected to generate
recurring revenues at higher margins than are generated by
manufacturing and selling simulators to independent third
parties as we have historically done;
- Through the sale of fractional ownership interests in each
NEXUSim simulator, we expect to recover our manufacturing
cost, pay any debt obligations and reinvest the available
funds in the manufacturing of subsequent simulators; and
- We have our software and manufacturing capabilities in place.
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<PAGE>
We do not expect to receive any significant revenue until at least
November 2000, when we project to sell fractional shares in our first
simulator under the NEXUSim program. Earnings are not expected to be achieved
until at least April 2001 when sales of fractional shares in our second
simulator are projected to occur. Revenues and improved operating results are
projected to occur after fractional interests are sold, simulators are placed
in service in our training centers and monthly service fees from fixed term
contracts are achieved.
We use the percentage of completion revenue recognition method for
simulators in which there is a contract from a third party. All of our income
from inception to December 31, 1999 was recognized in this fashion. For
simulators manufactured for the NEXUSim program, which began in the fourth
quarter of 1999, we will capitalize the cost of the simulators we build to be
placed in our own training centers and recognize the cost as an expense when
revenue from the sale of fractional ownership interests is realized.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Revenues were $1,498,192 and $1,028,569 in fiscal years 1998 and 1999,
respectively. We recognize revenue from third party manufacturing contracts on
the percentage of completion method. This $469,623 (31%) decrease resulted
primarily from the fact that in 1998 we completed two manufacturing contracts
and initiated one manufacturing contract while in 1999 we completed one
contract. We further decided in May of 1999 not to pursue any additional third
party manufacturing for the balance of 1999 and rather focus our manufacturing
efforts on our initial NEXUSim simulators.
GROSS MARGIN (LOSS)
Gross margin (loss) consists of sales less cost of sales. Cost of sales
consists primarily of the cost of material, manufacturing overhead, labor, and
subcontractors. Our gross margin was ($729,548) and ($390,579) in fiscal years
1998 and 1999, respectively. These margins represent (48.7%) and (38.0%) in
fiscal 1998 and 1999 respectively as a percentage of revenues. This ($338,969)
increase in gross margin in fiscal 1999 results primarily from a $378,969 loss
realized in 1998 on third party manufacturing contracts as well as a decrease in
materials, a decrease in direct labor and related payroll tax (because a portion
of these items related to NEXUSim projects in 1999 was capitalized into our
NEXUSim simulator manufacturing cost rather than being expensed). The increase
was partially offset by a loss of $108,034
29
<PAGE>
due to the projection that production costs of the Aims NEXUSim full flight
simulator will exceed revenue from the future sale of the fractional shares.
Costs of the simulator will exceed revenue because only six of seven
fractional interests will be sold; the other fractional interest will be
transferred to Aims Community College on the initial NEXUSim Beech 1900D as
partial compensation for arranging a term loan.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses consist primarily
of salaries and related costs of management, customer support costs, sales and
marketing, rent, basic office expenses, and professional services. SG&A expenses
were $832,249 and $1,286,559 in fiscal years 1998 and 1999, respectively. The
$454,310 increase is primarily due to $101,818 in increased salaries and payroll
cost for two executive officers that were added in 1999 and $315,415 in deferred
compensation expense (a non-cash item related to employee stock options).
Other Interest
We had $20,000 and $596,000 of other interest expense in fisca1 years
1998 and 1999 respectively. Of the $596,000 of other interest expense in 1999,
$372,000 was accreted (non-cash) interest related to two financings and
amortization of debt issuance cost of $91,000.
Income Taxes
Income taxes will consist of federal, state and local taxes, when
applicable. We expect net operating losses for tax purposes for 2000, which
should generate net operating losses. We have recorded no provision or benefit
for federal and state income taxes because we incurred net operating losses from
inception through December 31, 1999. We have, as of December 31, 1999,
approximately $5,970,000 of federal and state net operating loss carry-forwards
available to offset future taxable income which expire in varying amounts
beginning in 2017. Recognition of the net operating loss carry-forward and
these benefits requires future taxable income, the attainment of which is
uncertain, and therefore, a valuation allowance has been established for the net
operating loss benefit and for the deferred tax assets in excess of deferred tax
liabilities, and no benefit for income taxes has been recognized in our
statements of operations. The valuation allowance is reflected because of
recurring losses suffered by us and the fact that there is a question of our
continuing as a going concern and our being able to generate sufficient income
to utilize the NOL's before they expire.
LIQUIDITY AND CAPITAL RESOURCES
Prior to this offering, we have financed our operations through the net
proceeds generated from the issuance of common stock, contract revenues, long
term debt, and to a lesser extent from short term borrowings, including
convertible debt, some of which was subsequently converted into common stock.
From inception
30
<PAGE>
through the date of this offering, we have received net proceeds from the
issuance of common stock, long-term debt and short-term borrowings aggregating
approximately $7,390,000.
We used approximately $2,225,000 more in cash in operating activities
for 1999 than we generated. We increased our borrowings through a bridge loan
from private investors, which started in May 1999 and was completed in August
1999, with proceeds of approximately $830,000 ($741,000, net of offering costs).
These loans were repayable at the earlier of May 2000 or from the net proceeds
of this offering but are being automatically converted into common stock of the
Company at the closing of this offering. We have the right to extend these notes
for an additional six months at our option. We also received a loan on the same
terms as the bridge loan from two executive officers and directors of the
Company in the total amount of $60,000, except that these notes will not
automatically convert into common stock. We obtained from Aims Community College
Foundation a 14-month term loan totaling $2,020,000 (with a maturity of December
1 2000), of which $1,520,000 was received during 1999. We also received a loan
in December, 1999 of $2,500,000 from a private individual (with a maturity of
February 1, 2001), all of which will be received in 2000. We did not raise any
additional equity in 1999 as we did in the prior year.
We had a working capital deficit of ($2,154,622) as of December 31,
1999. Our principal commitments at December 31, 1999 consisted of $2,350,000 of
term debt and $1,057,000 of accounts payable and accrued expenses.
We had no material commitments for capital expenditures as of May 1,
2000. Our future capital expenditures will be primarily directed at expanding
our manufacturing facility in 2000, building out leased space for our training
centers, and enhancing our information and telecommunication systems. These
amounts from May 1 to December 31, 2000 are expected to be approximately
$235,000.
Our financial statements have a going concern qualification. This
qualification is based upon our current working capital deficit position, the
fact that we have had losses from inception resulting in an accumulated
deficit of approximately $6,300,000 at December 31, 1999 and the fact that we
have no existing contracts for the sale of a simulator or fractional
interests in a simulator. With completion of this offering, our working
capital will improve. Our plans for on-going operations through June 30, 2001
are described below.
We anticipate that our working capital needs from June 1, 2000 to June
30, 2001, will be met by the net proceeds from this offering, $8,700,000 from
the sale of fractional shares in the two simulators and recurring training
revenues of approximately $1,000,000. Additionally, we have loan proceeds of
$500,000 from the balance of the term loan from the Aims Community College
Foundation,
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$2,500,000 committed in December, 1999 by a private individual and approximately
$2,400,000 in vendor financing. The loan from Aims is being used to fund the
commencement of manufacturing our first simulator for our training center to be
located on the college campus in Greeley, Colorado. The private individual loan
is being used to fund the commencement of manufacturing our second simulator for
our training center. Also, one of our primary component manufacturers has
committed to provide $1,700,000 in vendor financing by our paying $300,000 for
the components at the time of the purchase order and the balance of $1,700,000
at the time of FAA qualification of the simulators containing the components. A
second component manufacturer has committed to provide $700,000 in vendor
financing by our paying $300,000 at the time of the purchase order and the
balance of $700,000 at the time of FAA qualification of the simulators.
We estimate that our cash needs for the period June 1, 2000 through
June 30, 2001 are approximately $13,500,000 for payment of on-going
manufacturing of two simulators, overhead costs, sales and marketing expenses,
general and administrative expenses and interest on and repayment of borrowings.
Through the sale of the fractional shares and the recurring training center
revenue, we believe that, upon completion of this offering, we will have
sufficient capital for our operations through at least June 30, 2001. We
anticipate having a positive cash balance throughout the period of June 1, 2000
to June 30, 2001.
We also need and intend to seek additional project financing to build
subsequent simulators. We have held discussions with several investors for a
series of financings of up to $10,000,000 each. Each $9,000,000 in financing
would permit the manufacturing of a regional jet simulator for our NEXUSim
training centers. This financing is uncertain, however, and we are not dependent
upon it. Should we not receive this additional financing to build subsequent
simulators, our future activities would be limited to operating the two Beech
1900D simulators in our initial training centers.
In 2001, we contemplate that the funds for the manufacturing of
subsequent simulators and for on-going operations will come from the monthly
contract revenue from the training centers, project financing as discussed
above, and the sales of fractional ownership interests in simulators to regional
airlines.
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BUSINESS
GENERAL
We develop and manufacture technology-based flight training products
for the commercial aviation market. Our products are full flight simulators
(which include motion) and flight training devices used in the training of
pilots. Our products incorporate sophisticated software with modules relating to
individual airplane functions.
We intend to use our manufacturing capabilities and knowledge about
simulators to enter into the service business of providing training centers for
airline pilots. Our establishment of these training centers will involve
manufacturing full flight simulators for the centers, selling fractional
ownership interests in these simulators and possibly entering into contracts
with customers for their use of simulators.
We plan to exploit the shortage of simulators for training regional
airline pilots in North America. Our proposed simulators are for selected types
of airplanes used by regional airlines. Also, based on our projections, our
fractional ownership interest program will offer an airline a lower upfront cost
and lower hourly rates for training its pilots when compared to the current
options of purchasing a simulator or paying the hourly rates of our competitors.
In order for an airline to use a simulator to satisfy pilot training
requirements of the FAA, the FAA must have qualified the simulator. We are one
of five companies that manufactures FAA qualified full flight simulators used in
North America. To our knowledge, in North America only one other company,
FlightSafety International, Inc., manufactures flight simulators for its own
pilot training centers.
STRATEGY
Our objective is to increase significantly our revenues by increasing
the volume of simulators we manufacture and sell and by providing training
centers for airline pilots. We also intend in the process to become a leading
provider of flight training services for the airline industry. In order to
achieve these objectives, we plan to:
- Utilize our experience with simulators to establish NEXUSim
pilot training centers with recurring revenues.
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- Build simulators primarily for our training centers, with only
a portion of our manufacturing capacity used for products sold
to unaffiliated third parties.
- Sell fractional ownership interests in our training center
simulators. Alternatively, engage in a sale-leaseback
transaction with a leasing company for a simulator in order to
realize cash at the time of completing a simulator and enter
into contracts with customers for the use of the simulator.
- Establish relationships with vendors for market support,
industry knowledge, component pricing, expedited delivery, and
financing for the purchase price of components.
- Establish joint arrangements with others in the training
industry for the operation of training centers.
- Establish relationships with financing sources for market
support, industry knowledge and financing.
- Focus on regional airlines whose training needs our management
expects to grow and create higher demand for simulators.
- Consider acquisitions (whether outright or in joint ventures)
of (1) used simulators, which we may upgrade, or (2) training
businesses to start or enhance revenues from training
services.
- Secure lease financing arrangements for the acquisition of
simulators by our customers.
MARKET OVERVIEW
TRAINING AIRLINE PILOTS
The FAA requires commercial airline pilot training in the United
States. This training includes initial, upgrade, transition and recurrent
training in the operation and performance of airplanes. At the airline's option,
a pilot can satisfy all or a significant portion of the FAA training
requirements in an FAA approved simulator. The FAA also requires the use of
simulators for high risk, low-altitude windshear flight training.
Initial training concerns instruction of pilots in the operation of an
airplane group (such as an airplane powered by turbo-propellers or an airplane
powered by jet engines) in which the pilot has not previously been qualified.
Upgrade training encompasses instruction of a crew member to become a pilot in
command or second
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in command of an airplane. Transition training concerns the instruction of
pilots in the operation of a different airplane within the same group. Recurrent
training is to keep pilots adequately trained and proficient with respect to the
pilot's current airplane. Pilots in command and first officers must successfully
complete recurrent training every six months and 12 months, respectively. The
FAA requires all of these types of training.
Instruction for pilots can be in simulators, can be in-flight using an
actual airplane or can be a combination of these methods. Training in a
simulator enables a pilot and airline:
- To practice procedures and techniques in a controlled
environment, including maneuvers that would be hazardous or
prohibitive in actual flight, such as responding to a fire, an
engine shutdown, a total system failure or other emergencies
that cannot be demonstrated on an airplane.
- To eliminate risks of damage to the airplane.
- To realize significant cost savings when compared to the cost
of flying an airplane for training.
Effective in March, 1997, the FAA issued a new regulation applicable to
all airlines that operate scheduled air carrier service in airplanes having more
than nine passenger seats. This new regulation encompasses regional airlines,
which, prior to this time, were subject to regulations for charter operations.
Among its provisions, the FAA regulations require all regional airlines to
conduct pilot training and reviews in accordance with the same provisions that
apply to major airlines. The FAA intended this significant change to encourage
one standard level of safety for all air carriers, regardless of the size of
their airplane fleet or the range of their flight operations. In connection with
this new regulation, the FAA also adopted a policy of encouraging regional
airlines to utilize simulator training for pilots in addition to or in lieu of
training in airplanes. In part because of these changes, the demand for pilot
training from regional airlines continues to grow while a shortage of FAA
qualified simulators exists.
Regional and major airlines are required by the FAA to provide training
for their pilots in a number of different circumstances, known as "training
events." Training requirements of a regional or other airline are directly
related to training events that take place. These training events include, for
example, recurrent training of an airline's existing pilots and promotion of a
co-pilot to the pilot in command.
Additional training events occur each time a pilot or co-pilot leaves
an airline. This attrition can be caused from a number of reasons, including
moving to a major airline or retiring. Major airlines are hiring new pilots at
record rates to meet
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their growth. The majority of the new pilots hired by major airlines come from
the regional airlines. For every pilot a major airline hires from a regional
airline, the regional airline must train the replacement pilot as well as the
other persons who become pilots or copilots as a result of that replacement.
Another significant training event is the addition of a new airplane.
Based upon information from an independent consultant (Aviation Information
Resources, Inc.), regional airlines in general have an average of ten pilots
(five captains and five co-pilots) to operate each airplane on a rotating
schedule. Therefore, each new airplane can result in ten pilot training events
concerning the hiring of new pilots or co-pilots to the new airplane. Other
related training events may also occur. For example, if an airline receives a
new regional jet, it may have five co-pilots of the same jet model become
captains for the new jet, resulting in upgrade training. Ten pilots in a
turbo-propeller airplane may then have transition or upgrade training so that
they can become five of the jet co-pilots on the new airplane. These pilots
replace, on the older jet, the five co-pilots that became captains. The purchase
of a single new airplane model can ultimately result in 25 training events. New
pilots replacing those moving from the turbo-propeller airplane may also be
hired and have either initial or transition training.
MARKET SEGMENTS
The market for training pilots in commercial aviation includes the
segments described below.
REGIONAL AIRLINES. Regional airlines typically fall into an FAA
category for passenger-carrying operations that are conducted (1) by jet powered
airplanes, or airplanes having more than nine passenger seats or airplanes with
a certain payload, and (2) between any points within the 48 contiguous states of
the United States, or entirely within any state, territory or possession of the
United States or between any point within the 48 contiguous states and any
specifically authorized point located outside of the 48 contiguous states. We
estimate that there are 95 regional airlines operating in the United States
(15-25 of these regional airlines operate only in Alaska). The market for the
training of regional airline pilots is growing because of:
- The FAA regulations as described above.
- The growth in regional airlines in terms of passengers and
routes.
- The increasing shift from turbo-propeller airplanes to
regional jets, and the increase in routes for the regional
jets.
- The effects of major airlines hiring pilots away from the
regional airlines.
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In the United States, 71.1 million passengers boarded airplanes
operated by regional airlines in 1998, compared to 35.2 million in 1988. The
number of passengers increased 7% in 1998 over the 1997 year, and there has been
a 25% increase in U.S. passengers boarding regional airlines during the past
four years. (This data is from reports issued by AvStat Associates and the
Regional Airline Association.)
U.S. regional airlines operated 2,150 airplanes in 1998, an increase of
2% from the 1997 fleet. Regional jets have been providing an increasing
percentage of the regional airlines capacity, reaching 24% at the end of 1998 as
measured by the number of passenger seats. (This data is from reports issued by
AvStat Associates and the Regional Airline Association.) These jets are a
significant reason for the growth of regional airlines. They fly farther than
turbo-propeller airplanes, which enables the airline to reach a larger market
share. For instance, Continental Express has used 70% of its 60 regional jets
for new markets (according to AIRTRANSPORT WORLD in December 1999).
MAJOR AIRLINES. Major airlines include air carriers conducting the same
operations as a regional airline and also having flights to destinations outside
the contiguous 48 states. Ten major airlines are headquartered in the United
States. Major airlines typically own and operate all training centers necessary
for their pilots and for that purpose purchase simulators.
CARGO CARRIERS. These airlines are generally carriers without fixed
schedules. They are treated like major or regional airlines for purposes of FAA
training requirements.
CORPORATE MARKET. The market for corporate airplanes is diversified and
includes many different types of airplanes and pilot training requirements. A
corporate pilot typically operates under FAA requirements for chartered
airplanes flying executive jets or small charter company airplanes.
FLIGHT SCHOOLS. This market consists of universities with aviation
programs and independent flight schools. There are estimated to be over 100
universities and over 350 flight schools in the United States.
We focus on regional airlines, although we may serve customers in other
market segments.
DEMAND EXCEEDING SUPPLY
Regional airline pilot training for the five aircraft types selected by
us is a $360 million annual industry, which management projects will grow to
$650 million by 2004. Training demand is being driven by record pilot hires,
approximately
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15,700 in 1999, compared to approximately 14,500 in 1998, and 5,400 in 1993,
according to Aviation Information Resources, Inc. ("AIR"). According to AIR,
30,000 new regional jet pilot jobs will be created by 2003. Orders for new
regional jets doubled in 1998 to 155.
The simulators which we plan to manufacture and place in our training
centers are for airplanes that are used by regional airlines. Our market
analysis shows that a sufficient number of simulators are not available to meet
all of the training demands of these airlines. This analysis is based upon two
current market studies; an internal study conducted by us and a second,
independent study conducted by AIR. AIR is an established information and
consulting group which has been studying worldwide aircraft simulator supply and
demand since 1991. The AIR study's conclusions were consistent with our internal
study. The conclusions and basis for those conclusions are discussed below.
We plan to simulate five airplanes used widely by the regional
airlines: (1) the Beech 1900, (2) Bombardier CRJ jet, (3) the Embraer ERJ jet,
(4) the Fairchild-Dornier 328 jet and (5) the Fairchild-Dornier turbo-prop. All
five are in the current fleets of regional airlines.
TDI'S STUDY. Our study is based on published data and phone calls to
airplane manufacturers and discussions with eight regional airlines about these
five airplane models. Our analysis is calculated on the basis of following
factors: (1) the number of airplanes currently in the fleets of regional
airlines in North America, (2) the number of airplanes to be delivered to these
regional airlines in the next five years, (3) the total number of pilots needed
per airplane, (4) an assumed 10% failure rate of pilots for recurrent training,
(5) a 30% annual pilot turnover for regional airlines, reflecting the current
average from our study, and (6) the assumption that 100% of the FAA training
requirements are met through the use of a simulator, rather than in-flight
training. These factors allow a calculation of training events and a total
number of training hours that are required, including some training that will be
done in flight.
The following table summarizes our internal analysis of simulators
that would be required to meet the training demands on March 1, 2000 and
January 1, 2004 for the five airplane models we plan to manufacture, if all
training was conducted in simulators. (The number of additional simulators
needed in the year 2004 includes simulators needed in each year from 2000 to
2004, and thus the number of simulators needed in 2000 is not to be added to
the number shown for 2004.)
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MARCH 2000
<TABLE>
<CAPTION>
DORNIER
BEECH CRJ-100/ ERJ- DORNIER 328 TURBO
1900 200/700 145/135 328/428
JET
<S> <C> <C> <C> <C> <C>
Number of Aircraft 286 239 138 7 45
Number of Pilots 2,860 2,390 1380 70 450
Training Hours Required 70,928 78,472 54,384 3,976 12,760
Number of Simulators Required 11 12 8 1 2
Number of Simulator Available 6 11 6 1 1
Additional Simulators Needed 5 1 2 0 1
</TABLE>
JANUARY 2004
<TABLE>
<CAPTION>
DORNIER
BEECH CRJ-100/ ERJ- DORNIER 328
1900 200/700 145/135 328/428 TURBO
JET
<S> <C> <C> <C> <C> <C>
Number of Aircraft 259 504 440 76 47
Number of Pilots 2,590 5,040 4,400 760 470
Training Hours Required 64,232 144,192 129,280 22,688 11,656
Number of Simulators Required 10 21 19 3.2 1.6
Additional Simulators needed (1) 4 10 13 2 1
</TABLE>
- ------------------------------------------
(1) Based on simulators available 3-1-2000
Our study shows a current shortage of nine simulators which is
projected to grow to a shortage of 30 simulators by 2004 to meet the training
needs of the five primary airplanes in our target market. As shown by the tables
above, the regional airline market is going through an unprecedented period of
new aircraft introduction and pilot hiring. We estimate that this trend, based
on existing airplane orders, pilot hiring rates and pilot retirement rates, will
continue for the next eight to ten years.
INDEPENDENT STUDY. AIR's methodology for forecasting simulator demand
is based on the historical curve for established aircraft fleets and their
simulators, stated as a ratio, and adjustments to the ratio to reflect existing
simulator inventories, aircraft or simulator orders plus options for aircraft,
estimated changes in aircraft
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utilization, training developments, and aircraft loss estimates. This
methodology takes into account the increased demand for simulators as the North
American regional jet fleet expands and matures.
The following table summarizes AIR's analysis of the need for
simulators from 2000 to 2004 based on its methodology for the five types of
airplanes. AIR estimates that the number of full flight simulators supporting
the North American fleet of Beech 1900, Canadair 100/200/700 Regional Jet,
Dornier 328/428 Regional Jet, Dornier 328 Prop and Embraer 135/145 Regional Jet
aircraft will increase from 24 on March, 2000 to 47 on January, 2004, creating a
need for 23 additional simulators.
GROWTH OF NORTH AMERICAN REGIONAL AIRLINE FLEET (1)
AIRCRAFT TYPE
<TABLE>
<CAPTION>
BEECH CRJ- ERJ- DORNIER DORNIER
1900 100/200/700 145/135 328/428 JET 328 PROP
<S> <C> <C> <C> <C> <C>
3-1-2000 286 239 138 7 45
1-1-2001 285 288 236 29 47
1-1-2002 272 381 331 52 47
1-1-2003 260 457 406 64 47
1-1-2004 259 504 440 76 47
</TABLE>
SIMULATORS REQUIRED
<TABLE>
<CAPTION>
BEECH CRJ- ERJ- DORNIER DORNIER SIMULATORS SIMULATORS
1900 100/200/700 145/135 328428 JET 328 PROP REQUIRED NEEDED (2)
<S> <C> <C> <C> <C> <C> <C> <C>
3-1-2000 5 11 6 1 1 24 0
1-1-2001 6 13 7 1 2 29 5
1-1-2002 6 16 12 2 2 38 14
1-1-2003 7 18 14 2 2 43 19
1-1-2004 7 19 16 3 2 47 23
</TABLE>
- ---------------------------------------
(1) Based on current aircraft orders.
(2) Number of simulators required, less number of simulators available
3-1-2000.
According to AIR, based on announcements by competitors of future
simulators (which is not an assurance of an actual installment), the following
number
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of simulators for each of these five types of aircraft will exist on January 1,
2001: 5 simulators for Beech 1900; 11 simulators for Canadair CRJ; 1 simulator
for Dornier 328/428 Jet; and 6 simulators for the ERJ-145/135 and 1 simulator
for the Dornier 328 Prop.
COMPARISON OF TWO STUDIES. TDI's study shows a current requirement for
34 simulators (11-Beech 1900's, 12-CRJ's, 8-ERJ's, 1-Dornier 328/428 Jets, and
2-Dornier 328 Prop) to meet the training needs of the five airplane models.
AIR's study shows a current requirement for 24 (5-Beech 1900's, 11-CRJ's,
6-ERJ's, 1- Dornier 328/428 Jet, and 1-Dornier 328 Prop) for the five airplane
models. The AIR methodology is based on long-term historical trends and a
stabilized airline industry. For example, an airplane such as the Boeing 747,
which has been in the fleet over 25 years, requires only recurrent simulator
training (8 simulator hours per pilot) for its pilots; thus, there is very
little transition or initial training needed. In contrast, regional jets, which
are just being introduced into the regional fleets, require not only recurrent
training for existing pilots, but also initial training (32 simulator hours per
pilot) and transition training (32 simulator hours per pilot) for the new pilots
to meet the pilot demands of the regional fleets. Therefore, an airplane
entering the market will require 4 to 5 times more training than an airplane
which has been in the market for years. TDI's study reflects the dynamics of the
current regional airline market by considering pilot hires (initial training),
pilot attrition (initial, transitional and upgrade training), and new airplane
fleet introduction and airplane deliveries (initial, transitional and upgrade
training).
TRAINING PRODUCTS
FULL FLIGHT SIMULATOR
Full flight simulators replicate the on-ground and in-flight
performance of an airplane and have a full-size cockpit environment. The cockpit
includes advanced day/night visual display systems. Actual airplane parts are
utilized to replicate the look, sound and feel of the airplane's on-ground and
in-flight operations. Full flight simulators include motion. The cockpit and its
instrumentation are connected to a hydraulically powered platform and computer
systems that move the cockpit and change the instrument readings in response to
action of the pilot trainee or the instructor. The instructor may activate the
computer to change flight conditions and airplane performance and to introduce
malfunctions, emergencies and airport approaches as desired.
Our sales price for full flight simulators sold to a third party
range from $7,000,000 to $12,000,000, depending on the airplane type and the
level of qualification. However, the total sales price for fractional
ownership shares in a simulator is substantially lower because the fractional
shares are accompanied by a service contract. Our manufacturing time
typically ranges from 14 to 24 months, depending on the airplane model.
Because a large percentage of the manufacturing time relates to the
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modification of software and engineering for each specific airplane, our
manufacturing time for additional simulators of a specific airplane can be
reduced to approximately 12 to 18 months after we have manufactured the first
simulator for the specific airplane.
FLIGHT TRAINING DEVICES
A flight training device typically does not have motion or visual
display systems. Flight training devices feature cockpit environments with high
fidelity airplane panels, avionics, displays and flight controls to replicate an
actual airplane. Flight training devices are used to master skills associated
with individual flight tasks and particular cockpit procedures. We have
manufactured flight training devices; however, in the foreseeable future we will
focus primarily on manufacturing full flight simulators. We may manufacture a
flight training device from time to time in the future particularly if requested
by a fractional owner of one of our full flight simulators or by a party with
which we have an existing business relationship.
Our sales prices for a flight training device range between $500,000
and $3,000,000, depending on the airplane type and the level of fidelity. Our
time for manufacturing a flight training device typically ranges from 14 months
to 18 months. Because of the time required to modify software for each specific
airplane, our manufacturing time for additional flight training devices of a
specific type of airplane can be reduced by approximately three to five months
after we have manufactured the first flight training device for that type of
airplane.
FAA QUALIFICATION
The FAA defines four levels of full flight simulators - A, B, C and D.
The most sophisticated are Levels C and D. The FAA defines seven levels of
flight training devices - Levels 1 through 7, with Level 7 having the highest
sophistication. These levels determine what type of pilot training required by
the FAA can be satisfied by the use of the full flight simulators or flight
training devices.
The FAA must qualify or approve the full flight simulator or flight
training device before it can be used to receive FAA training credits. The FAA
has requirements for the manufacturing of simulators. The FAA's qualification
process includes many tests of the simulator regarding systems and flight
performance.
MANUFACTURING PROCESS
Our manufacture and design of a simulator involves the following steps:
- Obtain data on the physical configuration and flight
characteristics of the airplane to be simulated. Data can be
purchased (1) from the manufacturer
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or (2) from a third-party supplier who conducts flight testing
of the airplane over a period of one to three months. Each of
the manufacturers of the Embraer ERJ and the Fairchild-Dornier
jets provide this data to only one operator of training
centers, and therefore we will obtain data on these airplane
models through flight testing conducted by us or others. The
cost of this data can range from $400,000 to $1,200,000.
- Design the specifications of the airplane into our standard
manufacturing process. This activity involves coordinating the
simulator's platform, the size of the airplane, control setups
and how the airplane's systems work.
- Order parts for the simulator from vendors. We expect that the
time between ordering and receiving parts under our current
vendor relationships will take from six to nine months. One
part can cost up to approximately $1,500,000.
- Develop software to simulate the operations of the airplane,
including the airplane's aerodynamics, systems and
environment. This step can take up to 12 months and can be
concurrent with other steps.
- Integrate the hardware components and the software.
- Test the simulator.
- Obtain the FAA's qualification for the simulator. Because we
have previously obtained FAA qualification of a simulator, we
expect that future qualifications for a simulator will take
three to five business days.
Currently we subcontract the manufacture of various components, such as
the base frame for simulators. We expect in the future to subcontract additional
components, including the cockpit shell.
Since our inception, we have been in the process of manufacturing from
one to three simulators at any one time. After this offering, we plan to
increase our volume to three or five simulators being manufactured at any one
time.
SOFTWARE
We have developed a software technology unique for simulators. This
software has an advanced architecture which has modules simulating the
individual airplane functions. The software has the advanced C++ programming
language. The software is used to simulate airplane functions and to link
components. The advantage of this modular software is that it adapts readily
from one simulator program for an airplane to another simulator program for a
different airplane. The modular features enable us to decrease the software
development costs across the
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airplane models. For example, up to 75% of the software used in a Beech 1900
simulator can also be used for another turbo propelled airplane simulator.
PROPRIETARY RIGHTS
We have proprietary rights in our software, know-how and names used in
our business. We do not have any patents or registered trademarks for any of
these items. We rely on copyrights, common law rights concerning names and
trademarks and trade secret protections for our proprietary technology. We grant
a license to a buyer of a simulator to use the software in the simulator.
SUPPLIERS
We acquire components for simulators from outside suppliers. Our
purchases are made from approximately 100 suppliers. Only a few suppliers
account for the higher price components, such as the visual display system, the
motion system, the control loading system, computers and instrumentation. We
believe that more than one supplier exists for each of the components needed for
our products.
WARRANTIES
As part of any contract with the purchaser of a simulator, we negotiate
a warranty on our product. Typically, the warranty covers defects in design,
materials or workmanship for a period of from 3 to 12 months. We have not
incurred, to date, any significant expenditures for warranty coverage.
RESEARCH AND DEVELOPMENT
In 1999, we spent $208,018 for research and development activities.
Most of these expenditures involved the redesign of the platform connecting the
motion system to the simulator. We expect to incur research and development
costs in the future. We also have costs for development of the initial simulator
of an airplane. These costs relate to matters such as designing the
specifications of a particular airplane into our manufacturing process and
modifying software to simulate the operations of the particular airplane; and,
since these costs are unique to a particular simulator, they are treated as part
of the cost of sales.
ENVIRONMENTAL MATTERS
Permitting and other requirements under environmental laws are not
applicable to our current manufacturing operations. The primary reason is that
we purchase components from suppliers and also subcontract some of the work in
manufacturing our products. Accordingly, we have not had any material
expenditures for compliance with environmental laws.
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MARKETING
We utilize a direct sales approach with our employees and officers
marketing our products. Sales are made through direct contacts in the commercial
aviation business and attendance at industry trade shows. With over 100 combined
years of experience with aviation simulators, our key operations personnel have
established relationships with a number of potential customers. We also keep
potential customers for our simulators informed of our progress regarding
developments and new programs via newsletters and postings on our website.
In January, 2000, we entered into a strategic alliance agreement with
Babcock & Brown LP ("B&B"), which is active in the United States in the leasing
of aircraft. B&B is introducing us to potential purchasers of fractional
ownership interests in simulators or hours for use in simulators manufactured by
us, primarily airlines. For these services, B&B is receiving warrants for the
purchase of 150,000 shares at a purchase price of $5.00 per share. In addition,
as incentive compensation, B&B will receive additional warrants based upon the
number of fractional ownership interests or 1,000 hour increments sold by us to
parties with which B&B has arranged a meeting or introduction for us. Incentive
compensation includes: Warrants to purchase 200,000 shares for the first
simulator, with each simulator consisting of six fractional ownership interests
or 6,000 hours; warrants for 150,000 shares for a second simulator; warrants for
75,000 shares for a third simulator; and warrants for 50,000 shares for a fourth
simulator. Pro-rata amounts are issued for sales of less than six fractional
ownership interests or 6,000 hours of a simulator for five years. Each warrant
is exercisable at the lower of fair market value or an exercise price ranging
from $5 for the first simulator to $10 for the fourth simulator. These warrants
will be issued for fractional ownership interests or 1,000 hour increments sold
within three years of the meeting or other form of introduction. B&B has the
right to cash out shares issuable, or actually issued upon the exercise of
warrants, at fair market value. This cash-out option can be exercised between
the fourth and seventh anniversary of the commencement of the agreement as of
January 31, 2000, and is payable over two years.
SALES
Since commencement of our operations in 1996, we have completed six
simulators for customers. These sales are summarized below.
- B767 - 200 Level C Full Flight Simulator Modernization. This
program involved the modernization of an Airborne Express
simulator to meet FAA Level C qualification. This work
included incorporating the latest data package from Boeing,
upgrading computers and modifying the windshear function,
instructor station and software. This project was completed in
1998.
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- Beech 1900D Level B Full Flight Simulator. This full flight
simulator was designed and manufactured for TechniFlite of
America, Inc. and is used in pilot training for regional
airlines. This simulator includes features such as a 6 degree
of freedom motion system, 150 degree day/night visual
capability and Level C flight performance. This simulator was
qualified by the FAA and represented the first qualification
of a full flight simulator for a new company in 13 years. This
project was completed in 1998. We shared development costs on
this project with TechniFlite, resulting in a price below our
manufacturing cost, in order to obtain the business and prove
our ability to manufacture a sophisticated, FAA qualified
simulator.
- A-320 Level 5 Flight Training Device. We completed an A-320
Level 5 Flight Training Device for Northwest Airlines in 1998.
The Level 5 provides training for system dynamics, flight
controls and systems malfunction.
- Regional Jet Full Flight Simulator. In 1998, we, working with
the Korean Aerospace Research Institute of South Korea,
completed development of a full flight simulator, with the
capability of having motion added, to meet design and training
requirements for Korea's next generation of regional jet
airplanes. The simulator provides cockpit, control loading,
visual system, sound and airplane system software.
- Two TC-12B Level 6 Flight Training Devices. In June, 1999, and
October 1999, we completed the manufacture of two flight
training devices simulating the TC-12B, which is a Beech 200
airplane. We manufactured these devices under a contract with
Thomson Training & Simulation and delivered them to the United
States Navy.
In addition, during the first quarter of 2000 we completed a contract
with Aims Community College in Greeley, Colorado, for a flight training device
simulating the Cessna 172. This Level 3 device is for use by students at this
college.
We contemplate that production will be devoted in the foreseeable
future to our proposed training centers, although some simulators may be
available for sales to unaffiliated third parties.
TRAINING CENTERS
Our proposed training centers will use simulators manufactured by us or
acquired by us as part of an existing pilot training center. The initial
simulators for this purpose are described under "NEXUSim Program" below. We
intend to have from one to four simulators at each training center.
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Our management intends initially to open two to five training centers.
We will determine the location of the simulators based upon the proximity to our
customers in the NEXUSim Program. We will lease the physical space for the
centers. The size of each initial center is expected to be approximately 10,000
square feet.
We plan to provide what is referred to as "dry" training, that is,
training without an instructor. The customer will provide its own instructor. If
requested, we will evaluate and possibly provide an instructor. We may also
enter into joint arrangements with parties in our industry who will provide
instructors for a training center.
The proposed steps involved in establishing a "dry" training center
include but are not limited to the following:
- Determine the level of interest of regional airlines in our
simulators and a training center, the number of hours of a
simulator needed by the potential customers and the specific
airplane to be simulated. This step is underway for the
initial training centers.
- Determine the location of the training center.
- Arrange for the lease for the center.
- Modify any facility to accommodate at least one simulator.
- Engage persons to administer training centers and maintain the
simulators.
- Transport the simulator to the training center.
- Obtain FAA qualification of the simulator at the training
center.
- Enter into management contracts at the same time as selling
fractional ownership interests in a simulator or entering into
contracts with customers for their use of simulators.
NEXUSim PROGRAM
FRACTIONAL OWNERSHIP INTERESTS
We have commenced the implementation of a fractional ownership interest
program called "NEXUSim." This program is designed to provide simulators to the
commercial aviation markets, particularly regional airlines. The NEXUSim program
will permit a customer to purchase a fractional, undivided ownership interest in
a
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simulator. Our goal in selling the fractional ownership interests is to recover
the development and manufacturing costs for a simulator.
We believe that we are the first in the industry to offer fractional
ownership interests in simulators. The program is modeled after the sale of
fractional ownership interests in business jets. A key to the success of the
NEXUSim program and our proposed training centers is the ability to market our
simulators and provide low cost training for the pilots of the fractional
interest owners.
The NEXUSim program involves the following significant features:
- Sell up to six fractional ownership interest shares in each
simulator. Any customer may purchase one or more shares. We
intend to retain the ownership of one share, which we will
utilize for training unaffiliated third parties at hourly
rates. The capacity of each simulator, being used for 20 hours
per day, is approximately 7,000 hours per year.
- Have each fractional ownership interest entitle the owner to
1,000 hours per year. As the administrator, we will coordinate
the scheduling of specific training times.
- Combine the sale of the fractional ownership interest with a
contract to maintain and administer the simulator as part of a
training center.
- State a right of first refusal for our benefit regarding a
transfer of each fractional ownership interest in the
simulator.
- In the case of simulators for Beech 1900D airplane and
possibly other turbo-propeller-powered planes, include
possibly a repurchase provision in an agreement with the
purchaser of a fractional interest. After three years, the
owner may require upon four months' notice that we repurchase
the fractional ownership interest at a fair market value
mutually agreed upon or determined by an appraiser. We have
included the possibility of this repurchase provision because
some of our potential customers may switch from Beech 1900
airplanes to another regional airplane, and we believe that
they will want a way to end at the same time their use of a
Beech 1900 simulator.
- Have the owner arrange the financing for the purchase price of
the fractional ownership interest. We will also endeavor to
arrange a financing package for customers who purchase
fractional ownership interests.
SALE AND LEASEBACK
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If we are not able to sell successfully fractional ownership interests
in a simulator, or if a customer wishes to contract for the use of 1,000 hour
increments of a simulator instead of purchasing one, we may utilize a
sale-leaseback transaction. We will receive similar benefits from a
sale-leaseback transaction as from a sale of fractional ownership interests.
After selling a simulator to a leasing company and leasing it back, we would
contract with customers for their scheduled use of a simulator in one of our
training centers. The significant features of the NEXUSim program would remain
the same as stated in the previous section except that:
- We would receive an amount of cash in the sale-leaseback
transaction determined in negotiations with the leasing
company.
- We would lease interests to customers in annual increments of
1,000 hours of time for a specified period, initially proposed
to be five years.
- The contract arrangement would not allow a transfer or
sublease of the interests.
INITIAL PRODUCTS UNDER NEXUSim PROGRAM
We propose that the first four simulators manufactured as part of the
NEXUSim program and placed in training centers will constitute the following:
- A Beech 1900D Level C Full Flight Simulator. This simulator
will be part of the joint arrangement with Aims Continuing
Education Authority discussed on page 51. Work on this
simulator commenced in September 1999, with completion
scheduled for October 2000.
- A Beech 1900D Level D Full Flight Simulator. We commenced work
on this simulator in November 1999 and plan to complete the
simulator in March 2001.
- If we have a joint arrangement with Aeroservice, as described
below in "Joint Arrangements for Training Centers," a Beech
1900D Level C Full Flight Simulator. We plan to commence
manufacture of this simulator in May, 2000 and to complete it
in May, 2001.
- Regional Jet or Dornier 328 turbo-prop Full Flight Simulator,
Level D. We contemplate starting the manufacture of this
simulator in the first quarter of 2001 with completion
scheduled for the fourth quarter of 2002.
The following table shows the proposed manufacture of the first two
products and additional products over the next four years.
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[OBJECT OMITTED]
Commencement of any simulators, after the first two simulators in the
table above, depends upon our obtaining external financing.
The types of simulators proposed by us and the timing of manufacturing
the simulators are subject to change. The final determination is contingent upon
the training needs of proposed customers who sign letters of interest, the
timing of completed sales of each simulator and our cash flow.
LETTERS OF INTEREST
We have obtained a few letters of interest regarding fractional
ownership interests in simulators. These letters of interest are with regional
airlines and are not binding.
We will request a definitive agreement with a proposed owner of a
fractional interest within approximately 75 to 120 days after obtaining a letter
of intent. However, our potential customers for the NEXUSim program tend to
focus on their immediate pilot training needs and specific dates for that
training; they may want to sign a definitive agreement only a short time before
FAA qualification of a simulator. It is not certain that any party signing a
letter of interest will actually enter into a definitive agreement.
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ACQUISITIONS
We have engaged in discussions with parties for the purchase of
existing simulators or pilot training businesses. Any transaction of this nature
could involve acquiring a simulator alone, acquiring a business using a
simulator or forming a joint venture regarding that equipment. It is not known
whether the purchase price for any transaction would be paid in stock, cash or
both. An acquisition, if pursued, could involve a business with significantly
more revenues than we have generated prior to this offering. The purpose of any
acquisition of this nature would be (1) to accelerate our entry into the
training services market, with resulting revenues, at an earlier time than is
possible through our establishing our own training centers, or (2) to expand our
training services. There are presently no agreements or understandings relating
to any specific acquisition.
JOINT ARRANGEMENTS FOR TRAINING CENTERS
AIMS CENTER
On September 14, 1999, we entered a joint arrangement with the Aims
Continuing Education Authority for partially financing our manufacture of a
simulator to be used in a training center at or near Aims Community College in
Greeley, Colorado. Aims Continuing Education Authority is a non-profit
organization related to Aims Community College, which has a pilot training
program. Under this arrangement, in summary, the parties have agreed to the
following:
- Aims Community College Foundation has loaned to us $2,020,000,
which is a portion of the estimated total cost to develop and
manufacture a Beech 1900D Full Flight Simulator, Level C. This
is the same type of simulator we completed in 1998 for another
party. In September, 1999, $1,000,000 of this loan was
advanced to TDI. We borrowed the remaining $1,000,000 with
drawdowns in December, 1999 and April, 2000 as we manufacture
the simulator. We commenced work on this simulator in
September, 1999.
- We are to manufacture the Beech 1900D simulator and qualify it
with the FAA within approximately 14 months from the start
date of the manufacturing.
- In repayment of Aims' loan, we are to pay $2,020,000 in
approximately 14 months, plus monthly interest accruing at
prime rate, adjusted for changes in the rate but not to exceed
21%; as of December 31, 1999, the interest rate was 8.5%. This
loan matures on December 1, 2000 and interest is payable on
the first day of every third month beginning December 1, 1999.
We contemplate that the source of this repayment may be
proceeds of selling four fractional ownership interests in the
simulator.
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- As collateral for this loan, we granted a security interest to
Aims in all of our inventory, equipment, furniture, fixtures,
accounts, instruments, documents, chattel paper and other
rights to payment, general intangibles and all proceeds of
these items, whether now owned or acquired in the future. The
proceeds received from the sale of each fractional ownership
interest must first be applied to repay this loan and release
that share of the fractional ownership interest from the
security interest held by Aims.
- We are to transfer one fractional ownership share, allowing
1,000 hours per year of training at no additional charge to
Aims. Aims may purchase additional hours at a price of $65 per
hour. We are to maintain the simulator in which Aims has a
fractional interest, without any charge to Aims. We will also
market for Aims the simulator hours to which Aims is entitled
but does not intend to use. We will be paid a fee equal to 50%
of all fees collected to market these hours of training.
- Aims will have a right of first refusal to acquire any other
fractional ownership interest sold in the simulator by other
owners.
- Aims or a related party will lease to us approximately 4,000
square feet required for this particular simulator in a
building located on or near the Aims Community College campus,
and the building will meet our specifications. We will lease
the building for an initial term of 10 years, with a
subsequent option to renew the lease for a term of five years
at an annual rental rate which is equal to the rental at the
end of the ten-year term increased by the cumulative consumer
price index for the prior five years. Thereafter, we have the
option to extend the term of the lease for up to an additional
6 months on a month-to-month basis, at an increased rental
rate. The annual lease payment during the first 10 years will
be $127,000, or $10,583.33 per month, for each of the first
four years, $137,000, or $11,416.66 per month, for the years
five through seven, $147,000, or $12,250.00 per month, in
years eight to ten and $147,000 during the five-year option
period as increased by the consumer price index for the five
prior years. In addition, we must pay all charges relating to
leased premises, including but not limited to, our share of
taxes, utility charges, insurance premiums and building
service costs.
- We will place a training center in that building and we will
manage the training center.
AEROSERVICE PROPOSAL
In January, 2000, we entered into a memorandum of understanding with
Aeroservice Aviation Center, Inc. ("Aeroservice"). Aeroservice offers commercial
aviation training to airlines and individuals at three facilities with 12
simulators. Aeroservice's equipment has been qualified by the FAA and is
recognized by some foreign governmental authorities. This recognition enables
certain foreign students to
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receive credit for their training at Aeroservice's facilities. We and
Aeroservice propose to market, manufacture and operate jointly full flight
simulators for training programs with airlines in Florida, Brazil and Mexico.
The memorandum of understanding contemplates a further agreement prior to
expiration of the understanding on July 31, 2000.
BACKLOG
The Company has no backlog of contracts or orders for simulators.
DEPENDENCE ON CUSTOMERS
In our manufacture of simulators for unaffiliated third parties, we
have served, and will continue in the future to serve, a few customers or
possibly one customer at any particular time. The NEXUSim program will broaden
the base of our customers, with up to seven customers for each simulator. These
customers will also utilize our training center containing their simulator.
Because of the limited number of customers at this time and for the
foreseeable future, we are dependent upon maintaining and satisfactorily serving
our customers. The loss of any one customer, because of a bankruptcy of the
customer, cancellation, delay or other events, could materially and adversely
affect our present and future revenues. If the loss of a customer relates to our
performance, that loss could also have a negative impact on our reputation in
the industry.
Our universe of potential customers is limited to a relatively small
number because it consists primarily of regional airlines in need of, or
conducting, pilot training. Any developments in that industry or how members of
that industry view us can have a significant effect on us.
COMPETITION
We face intense competition in the manufacture and sale of simulators
and in our proposed training services.
MANUFACTURING
In addition to us, four companies manufacture most FAA qualified full
flight simulators used in commercial aviation in North America. These companies
are FlightSafety International, Inc., CAE Inc., Reflectone, Inc. and Thomson
Training & Simulation. CAE manufactures more than a majority of the full flight
simulators added each year in North America, primarily for major airlines.
Reflectone Inc. manufactures full flight simulators but primarily at this time
for the United States military. Our competitors operate domestically and
internationally and are significantly larger than us in terms of revenues,
assets and employees. Further, a number of smaller companies
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manufacture flight training devices, but we do not consider them as competitors
because they provide products with a lesser level of sophistication.
Two of our competitors manufacture at this time FAA qualified full
flight simulators for airplanes used by regional airlines. FlightSafety makes
simulators for the Beech 1900 airplane and regional jets; CAE produces
simulators for regional jets.
Barriers to entry for new manufacturers are significant due to the high
initial capital cost and the need to use the sophisticated software technology.
We also compete with the alternative of in-flight training. However, we
believe that the FAA requirements, together with the complexity of current
airplanes, make the training with simulators more comprehensive and cost
effective.
In our manufacture and sale of simulators, we compete primarily on the
basis of low prices and by manufacturing simulators for specific types of
airplanes used by regional airlines. Our proprietary software provides cost
savings which help in keeping our manufacturing costs low. We and other
manufacturers are all favorably affected by the limited number of simulators for
specific airplanes used by regional airlines and a growing demand for these
simulators. We also hope to obtain a competitive advantage by offering our
fractional ownership interest program. We intend that this program will provide
an airline lower than average market hourly rates for use of a simulator.
The quality of all simulators must be high, and the simulators must all
match the specifications of an airplane and FAA requirements. Like our
competitors, we must continually strive to improve our quality and
responsiveness to the needs of airlines and other customers in commercial
aviation.
A competitive disadvantage of our manufacturing operations results from
our small size and relatively short time in the industry. Another competitive
disadvantage for us in securing unaffiliated third party manufacturing contracts
has been our requirement that the customer make progress payments on the
manufacture of simulators. Some manufacturers in the industry allow payment of
the purchase price when a product is completed.
TRAINING CENTERS
Typically, regional airlines have not bought simulators. Instead, they
rely upon training companies and a few major airlines for simulator training.
Various training companies located throughout the United States provide pilot
training with full flight simulators. These training organizations include
FlightSafety. FlightSafety has a number of training contracts with major and
regional airlines as well as corporate customers. The other competitors include
government agencies. The majority of these organizations do not have simulators
for airplanes used by regional airlines.
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Other parties may possibly enter into the training business by buying a
simulator. The likelihood of a competitor entering the training business by this
approach is decreased somewhat because of the limited availability of simulators
for specific airplanes.
Our proposed training centers in connection with the NEXUSim program
will compete primarily on the basis of a low price overall for training services
and the limited availability of simulators for specific airplanes used by
regional airlines. Our low price will depend upon our ability to keep costs low
in our manufacturing of the simulators used in the training centers. A
competitive disadvantage to our proposed training centers results from our small
size and our being a new entrant in the training business. Our ability to
complete sales to a regional airline may also be affected by long-term contracts
between FlightSafety or another training organization and the regional airline.
We will aggressively market our service through direct contact. We plan
to keep potential customers informed of progress on simulators so that the
potential customer can take into account our schedule in dealing with other
training organizations.
Also, our attracting customers for the proposed training centers
depends, at least in part, on the sales of fractional ownership interests in
simulators or leasing interests in simulators following a sale-leaseback. Thus,
the fact that the NEXUSim program is a new concept for pilot training centers,
and the other competition factors noted above for manufacturing, will affect our
sales of training services.
GOVERNMENTAL REGULATION
In the United States, the Federal Aviation Administration regulates the
operation of airlines and related activities. As mentioned earlier in this
prospectus, the FAA has requirements for the training of pilots, encourages the
use of simulators and sets forth standards for simulators. Each simulator must
be qualified and approved by the FAA for a pilot training center and be
maintained in accordance with FAA requirements.
In addition, the FAA regulates training centers for pilots and other
members of a flight crew. Each "wet" training center (i.e., an instructor made
available as part of the training center) must be approved by the FAA and must
comply with training specifications of the FAA. These specifications concern,
among other things, qualified instructors and the adequacy of the facility. As
mentioned earlier in this prospectus, we intend to provide only "dry" training.
On a case by case basis, we may consider supplying the instructor for the
simulator. In such case, the instructor would have to be approved by the FAA,
but we would not be subject to all of the other FAA specifications concerning
training centers. The airlines will be responsible for complying with the other
FAA specifications.
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EMPLOYEES
At February 29, 2000, we had approximately 29 employees, of which 27
were full time employees. Twenty-four employees were engaged directly in project
related engineering and production activities. Two employees were engaged in
accounting and finance, and the remaining three were officers engaged in
operations, administration and sales. With the anticipated increase in
concurrent production of up to five simulators, we expect to increase our work
force to up to approximately 60 employees.
Most employees are salaried workers. No collective bargaining unit
represents our employees. We have never experienced a work stoppage and consider
our relations with employees to be satisfactory.
OUR FACILITY
We lease our current facility and own most of our equipment. Our
facility, located in Englewood, Colorado, has approximately 14,040 square feet
located in an industrial park and was constructed in 1998. The facility includes
approximately 12,000 square feet dedicated to manufacturing, with the remaining
space used for engineering and corporate offices. The lease for this facility is
for a term ending May 31, 2003. We have the right to extend the lease for an
additional five years on the same terms and conditions except that the base rent
will be revised to an adjusted market rate rent. We pay a monthly base rental
rate of from $7,020 to $7,488 depending upon the year of the lease.
In 2001, we plan to move to larger facilities to accommodate expansion
of our operations so that we can manufacture three to five simulators at the
same time and increase our engineering personnel. We plan to sublease our old
premises. We project that our new facility will have approximately 32,000 square
feet.
As part of our entry into training services, we intend to lease space
for three to five training centers. It is contemplated that each of these
centers will, in general, have approximately 10,000 square feet.
LIABILITY INSURANCE
Among other things, we and others in our industry have exposure to
potential liabilities relating to the use of a simulator. This large equipment
could injure or kill persons training or working with the equipment. Also, when
there has been an airplane accident in the United States allegedly involving
pilot error, plaintiffs have made claims against training organizations and the
manufacturers of simulators, alleging responsibility for the error.
Because of the risks entailed in our business, we maintain general
liability insurance. The insurance is provided on the basis of events occurring
during the policy period and has been in effect since March, 1996. Policy limits
of our product liability
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insurance were $1 million through March 31, 2000 and are currently $5 million
per occurrence, with an aggregate maximum of $2,000,000 for policies through
March 31, 2000, and of $5 million currently. We have not had a product liability
claim.
After consultation with our insurance broker, our management believes
that our current liability insurance is at a proper level in our industry.
However, we cannot be sure that our insurance is adequate to cover potential
liabilities. We also cannot assure you that liability insurance will continue to
be available on acceptable terms, or whether it will be available at all.
YEAR 2000 ISSUES
We have determined that our computers and products are prepared to
recognize the Year 2000 and other years in 21st Century. Our modular software
does not have features relating to a date. Accordingly, any Year 2000 issues
that may affect us will be caused by the lack of preparedness on the part of
customers or suppliers with which we do business. We have not experienced any
significant Year 2000 issues in our operations and have not been made aware of
any significant Year 2000 issues at our suppliers. We are generally aware of
alternative suppliers for components in our products.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ronald C. Ellington........................ 56 Chairman of Board of Directors and Chief
Executive Officer
Bruce S. Betschart......................... 52 President, Chief Operating Officer and
Director
Robert E. Sawyer, Jr....................... 54 Vice President - Engineering and Secretary
Charles Douglas............................ 47 Vice President - Operations
Dennis J. Meyer............................ 42 Vice President, Chief Financial Officer and
Treasurer
Ann Torre Grant............................ 42 Director
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John Jenkins............................... 50 Director
Peter Roy.................................. 43 Director
</TABLE>
- --------------------------
Our Articles of Incorporation provide for a classified Board of
Directors with each director serving staggered terms of three years. The Board
of Directors is divided into three classes: Class I, whose term will expire at
the annual meeting of stockholders to be held in 2000; Class II, whose term will
expire at the annual meeting of stockholders to be held in 2001; and Class III,
whose term will expire at the annual meeting of stockholders to be held in 2002.
Mr. Jenkins is the class I director; Mr. Ellington and Ms. Grant are the class
II directors and Mr. Betschart and Mr. Roy are the class III directors. At each
annual meeting of stockholders beginning with the 2000 annual meeting, the
successors to directors whose terms expire will be elected to serve from the
time of their election and qualification until the third annual meeting
following election or until their successors have been elected.
A brief description of the background and business experience of our
executive officers, directors and key employees is set forth below.
RONALD C. ELLINGTON. Mr. Ellington joined TDI in January 1999. From
1994 to 1998, Mr. Ellington was CEO of Ellington Investments providing
management consultation, merger and acquisition and investment banking services.
From 1992 through 1994, he was Senior Vice President and Chief Operating Officer
of Dorsey & Company Securities, Inc., a full service securities firm in New
Orleans, Louisiana with over 30 employees. While COO at Dorsey, he directed the
implementation of the firm's first operating budget, strategic plan and cost of
sale's review and the firm had its highest revenues and profits in four years.
His prior experience includes CEO of a pole and piling company; CEO and
principal of start up regional investment banking firm that placed debt and
equity; COO and principal of start up regional real estate syndication firm that
raised equity and acquired commercial real estate properties; and COO and
principal of start up health care consulting firm that provided services to
national health care firms and individual hospitals plus the State of Louisiana.
He received his Master's and Bachelor's degrees in Journalism from the
University of Georgia.
BRUCE S. BETSCHART. Mr. Betschart co-founded TDI in 1995 and since that
time, has served as President and Chief Operating Officer and as a member of the
Board of Directors. From 1989 to 1995, Mr. Betschart was Vice President, Product
Development of CTA Incorporated, a simulator products company. CTA developed 21
flight simulators during Mr. Betschart's tenure. In 1986, he founded I.C. Sim
Incorporated, a simulator software company, and served as its President until
1989 when it was sold to CTA. Mr. Betschart has over 25 years of experience
marketing, designing, manufacturing and servicing simulators and simulation
products. Mr. Betschart was a
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U.S. Navy carrier pilot and a commercial pilot with Continental Airlines. Mr.
Betschart received his BS degree in Aeronautical Engineering from San Jose State
University.
ROBERT E. SAWYER, JR. Mr. Sawyer co-founded TDI in 1995 and since that
time has served as Vice President of Engineering and as a member of the Board of
Directors. Prior to starting TDI, Mr. Sawyer was the Vice President, System
Engineering at CTA Incorporated, where he was the lead software engineer for
simulator and simulation programs. Prior to joining CTA in 1989, he founded,
with Mr. Betschart, I.C. Sim Incorporated, where he served as Vice President. At
I.C. Sim, he was the principal architect on the development of MSS, an advanced
simulator software product that was sold to every major airframe manufacturer
and aerospace company in the United States. MSS was used to develop simulators
for the F-16, F-15, F-18, F-22, F-23, AH-66 and F-14 military airplanes; and the
B747, B727, and Piper Malibu commercial airplanes. Mr. Sawyer received his BS in
Electrical Engineering from the University of Illinois.
CHARLES DOUGLAS. Mr. Douglas has served as Vice President of Operations
since TDI was founded in 1995. Prior to joining TDI, Mr. Douglas was Director,
New Business Development for Frasca International and Senior Program Manager for
Rediffusion Simulation Incorporated, where he directed the development of 25
full flight simulators, flight training devices and cabin evacuation training
programs for commercial airlines. Mr. Douglas participates on the FAA working
groups for the development of Simulator Advisory Circulars. Mr. Douglas received
his BS degree in Computer Sciences from the University of Tulsa.
DENNIS MEYER. Mr. Meyer has been our Vice President, Chief Financial
Officer and Treasurer since August, 1999. From 1993 to 1999, Mr. Meyer served as
Vice President of Finance, Controller and Secretary to the Board of Directors of
Melco Industries, Inc. which is a leading manufacturer of computerized equipment
and software for making embroidery. During the period from 1986 to 1991, Mr.
Meyer was Assistant Controller and Cost Accounting Manager for the same company.
He received his BBA in Finance from the University of Iowa in 1980.
PETER ROY. Mr. Roy joined our Board of Directors in January, 2000. He
serves on the Board of Directors for Stonyfield Farm, White Wave Soy Products,
Mountain Sun Organic Juices, USA Floral Products and Fitness Holdings, Inc. From
1993 until 1998, Mr. Roy served as President of Whole Foods Market, the nation's
largest retailer of natural and organic foods. While Mr. Roy was President,
Whole Foods Market went public. From 1988 to 1993, he was president of the
California region for Whole Foods Market. In 1984, Mr. Roy founded and became
president of the Natural Foods Network, an industry trade association that
brought together the entrepreneurs of the natural foods industry.
ANN TORRE GRANT. Ms. Grant joined our Board of Directors in January,
2000. She is a member of the Board of Directors of Franklin Mutual Series Funds,
SLM Holding Company (Sallie Mae), Condor Technology Solutions, Inc. and U.S.A.
Floral Products,
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Inc. From 1995 to 1997, Ms. Grant was the Executive Vice President, Chief
Financial Officer and Treasurer for NHP Incorporated, the second largest
provider of property management and related services to the U.S. multifamily
housing market and the fourth largest commercial mortgage bank in the U.S. From
1991 to 1995, she served as Vice President and Treasurer for U.S. Airways Group,
Inc. and U.S. Airways, Inc. Ms. Grant was Assistant Treasurer-Financing from
1989 to 1991 and Director-Financing from 1988 to 1989 for U.S. Airways Group,
Inc. and U.S. Airways, Inc. From 1983 to 1988, Ms. Grant held various positions
in the financing departments of American Airlines, Inc. She received her
Bachelor of Business Administration in Accounting from the University of Notre
Dame in 1979 and a Master of Business Administration from Cornell University in
1983.
JOHN JENKINS. Mr. Jenkins joined our Board of Directors in January,
2000. Since 1995, Mr. Jenkins has served as the Chairman, Chief Executive
Officer and President of TAVA Technologies, Inc., a publicly-held company which
is an information technologies service company specializing in the design,
configuration and installation of information technology systems to support
manufacturing. From 1990 to 1995, he was President of Morgan Technical Ceramics,
Inc., and Vice President of Development, Mechanical Carbon and Graphite for
Morgan Crucible Company, a leading global manufacturer of engineered materials,
such as high purity carbon graphites and technical ceramics. From 1973 to 1990,
Mr. Jenkins held various positions, including Vice President and General
Manager - Structure Ceramics Division, and Vice President of Subsidiary
Operation, for Coors Ceramic Company, a leading international manufacturer of
high purity technical ceramic components for industrial applications. He
received his B.S. in Mechanical Engineering from the University of Washington
and his Juris Doctor from the University of Denver.
There are no family relationships among any of our directors, executive
officers and key employees.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has established a compensation committee and an
audit committee.
The Members of the compensation committee will be Mr. Roy, as
chairperson, Ms. Grant and Mr. Jenkins. The compensation committee reviews and
approves our compensation and benefits for our executive officers and makes
recommendations to the Board of Directors regarding these matters.
The Members of the audit committee will be Ms. Grant, as chairperson,
Mr. Jenkins and Mr. Roy. The functions of the audit committee are:
- Review the scope of the audit procedures utilized by our
independent auditors;
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- Review with the independent auditors our accounting practices
and policies;
- Consult with our independent auditors during the year; and
- Report to our Board of Directors with respect to these matters
and to recommend the selection of independent auditors.
DIRECTOR COMPENSATION
Directors who are also employees of TDI receive no additional
compensation for serving as a member of our Board of Directors. We reimburse our
directors for all reasonable travel and other incidental expenses incurred in
connection with meetings or actions of our Board of Directors.
We compensate non-employee directors $750 for each Board meeting which
the director attends. Also, each non-employee director received in December,
1999, options to purchase 35,000 shares of common stock at an exercise price of
$5.00 per share. Options as to 5,000 shares were vested on the date of grant,
and the options for the other 30,000 shares will vest in 10,000 share increments
over a three-year period based on the date of grant, if the option holder
continues to serve as a director of TDI. Under our current policies, a new
director in the future will receive options on the same basis, and these options
will have an exercise price equal to 100% of the fair market value of the common
stock on the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by us to our
Chief Executive Officer and to our President for services rendered in all
capacities for the fiscal year ended December 31, 1999. No other executive
officer had an annual compensation for 1999 that exceeded $100,000.
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<PAGE>
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL OPTIONS
POSITION YEAR SALARY BONUS (NUMBER)
------------------ ---- ------ ---- --------
<S> <C> <C> <C> <C>
Ronald C. Ellington,
Chairman of Board of Directors
and Chief Executive
Officer....... 1999 $62,595 $10,000 115,000
Bruce S. Betschart,
President and Chief
Operating Officer........ 1999 $112,592 $7,500 25,000
</TABLE>
Beginning in 2000, our five executive officers will receive an annual
salary exceeding $100,000 as follows: Ronald C. Ellington, Chairman of Board of
Directors and Chief Executive Officer, $125,000; Bruce S. Betschart, President
and Chief Operating Officer, $120,000; Charles Douglas, Vice
President-Operations, $105,000; Dennis J. Meyer, Vice President and Chief
Financial Officer, $105,000; and Robert E. Sawyer, Jr., Vice
President-Engineering, Secretary and Director, $105,000. In addition to the
salaries noted above, officers received the following bonuses on January 4,
2000: Ronald C. Ellington, $12,000; Bruce S. Betschart, $10,000; Charles
Douglas, $7,000; Dennis J. Meyer, $7,000; and Robert E. Sawyer, $7,000.
The following table provides information concerning grants of options
to purchase our common stock made during the year ended December 31, 1999 to the
executive officers named in the Summary Compensation Table above.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE ($/SH) DATE
---- ------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
Ronald C. Ellington 115,000 37.5% $.15/50,000 4/27/04
$4.50/40,000 4/27/04
$5.00/25,000 12/23/04
Bruce S. Betschart 25,000 8.1% $5.00 12/23/04
</TABLE>
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<PAGE>
As part of the grants of options to officers and employees in 1999, we
granted options to purchase our common stock to other executive officers and
persons related to executive officers as follows:
- Robert E. Sawyer, Jr., 25,000 shares at an exercise price
$5.00 per share;
- Charles Douglas, 38,333 shares, 13,333 of which have an
exercise price per share of $0.15 and 25,000 of which have an
exercise price per share of $5.00;
- Dennis J. Meyer, 57,000 shares, 7,000 of which have an
exercise price per share of $6.75 and 50,000 of which have an
exercise price per share of $5.00;
- Jeffrey Betschart, an employee of TDI who is the son of Bruce
S. Betschart, 1,667 shares at an exercise price per share of
$6.75;
- Steve Sawyer, an employee of TDI who is the brother of Robert
E. Sawyer, Jr., 1,667 shares at an exercise price per share of
$6.75; and
- Jann Sawyer, an employee of TDI who is the wife of Robert E.
Sawyer, Jr., 833 shares at an exercise price per share of
$6.75.
The following table provides information concerning any exercises of
options to purchase our common stock in the fiscal year ended December 31, 1999,
and unexercised options and warrants held at fiscal year end by the executive
officers named in the Summary Compensation Table. The value of the unexercised
options that are in the money was calculated by determining the difference
between the initial public offering price of $7.00 per share and the exercise
price of the options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING VALUE OF UNEXERCISED
ON VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
NAME EXERCISE REALIZED AT DECEMBER 31, 1998 AT DECEMBER 31, 1999
---- --------- -------- --------------------- --------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald C.
Ellington 0 $0 63,333 51,667 $347,833 $66,667
Bruce S.
Betschart 0 $0 6,000 36,334 $15,666 $78,670
</TABLE>
1997 AND 1999 STOCK OPTION PLANS
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Our 1997 Incentive and Nonstatutory Stock Option Plan was adopted by
the directors as of December 20, 1996 and later amended as to the number of
shares available under the plan. Under the 1997 plan, we may grant options to
purchase up to 335,667 shares of our common stock. The Company also has a 1999
stock option plan which was adopted by our Board of Directors on July 27, 1999.
The 1999 plan has 400,000 shares of our Common Stock available for the grant of
options.
Grants under the 1997 and 1999 plans may consist of (1) options
intended to qualify as incentive stock options under the Internal Revenue Code
and (2) non-qualified stock options that are not intended to so qualify. Persons
eligible to receive incentive stock options under the plans are only our
employees; non-qualified stock options may be granted to employees, directors,
consultants and (and in the case of the 1997 plan) other persons. The 1997 plan
terminates on December 31, 2006, and the 1999 plan terminates on August 30,
2009.
Each plan is administered by the Board of Directors or a committee
appointed by the Board consisting of two or more directors. The Board or
administrating committee determines the persons to be granted options, the
exercise price per share for each option, the expiration date of each option and
other terms which may be set forth in an option agreement. The Board of
Directors currently administers both plans.
The exercise price of an incentive stock option granted under the plans
cannot be less than 100% of the fair market value of the common stock on the
date of the grant. The Board determines the exercise price of a non-qualified
stock option; in the case of the 1999 plan, the exercise price of a
non-qualified stock option cannot be less than 85% of the fair market value of
the common stock on the date of grant. The term of any stock option cannot
exceed ten years. However, the exercise price of an incentive stock option
granted to any person who at the time of grant owns stock representing more than
10% of the total combined voting power of all classes of our capital stock or
any of our affiliates must be at least 110% of the fair market value of our
common stock on the date of grant and the term of such an incentive stock option
cannot exceed five years. Options granted under the plans vest at the rate
specified in any option agreement. The exercise price may be paid in cash or
other shares of our common stock, as determined by the Board of Directors or the
administering committee.
In the event of a proposed sale of all or substantially all our assets,
or the merger of TDI with another corporation in a transaction in which we are
not the survivor, then the surviving entity must assume or provide a substitute
for each outstanding option or, alternatively, our Board of Directors may
terminate an outstanding option by permitting the option to be exercisable as to
all shares subject to the option, whether or not previously vested, for a period
of thirty days (or not less than 10 days in the case of the 1999 plan) after a
notice to the option holder.
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<PAGE>
All outstanding options under the 1999 plan become immediately
exercisable and full, whether or not there were vesting requirements, upon the
occurrence of a change in control. For this purpose, a change in control occurs
(1) at the time a third person or group becomes the beneficial owner of shares
with 50% or more of the total number of votes cast for the election of our
directors; (2) on the date our stockholders approve a merger or consolidation
(unless our shareholders continue to own after the merger or consolidation more
than two-thirds of the voting securities of the resulting corporation in
substantially the same proportion as their ownership of our voting securities
before the merger or consolidation) or any sale or other disposition of all or
substantially all of our assets, or (3) a sale or other disposition of more than
50% in fair market value of our assets outside the ordinary course of business.
In determining whether clause (1) of this definition has been satisfied, a
person who beneficially owns shares having 10% or more of the total votes cast
for election of our directors as of September 7, 1999 is excluded.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our Bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent permitted by Colorado law. We have also entered into
indemnification agreements with each of our directors and executive officers.
All indemnification agreements are identical. These agreements provide, among
other things, for indemnification and advancement of expenses to the fullest
extent permitted by law in connection with any legal proceeding in which the
person was made a party because the person was a director or executive officer
of TDI, place the burden of proof on us in regard to whether an individual has
met the required standard of conduct for indemnification, cover procedural
matters such as the hiring of counsel and require us to pay the expenses of the
director or executive officer in enforcing any required indemnification or
advancement of expenses.
In addition, our Articles of Incorporation provide that to the fullest
extent permitted by Colorado law, our directors will not have personal liability
to us or our stockholders for monetary damages for any breach of fiduciary
duties as a director. This does not eliminate the duties themselves, and in
appropriate circumstances, equitable remedies such as injunction or other forms
of nonmonetary relief remain available under Colorado law. This provision does
not eliminate the liability of a director for (1) any breach of the director's
duty of loyalty to us or our stockholders; (2) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law; (3)
unlawful dividends, stock repurchases or redemptions; or (4) any transaction
from which the director derived an improper personal benefit. This does not
affect a director's responsibilities under other laws such as the federal or
state securities laws.
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<PAGE>
There is no pending litigation or proceeding involving a director or
officer as to which indemnification is being sought. We are not aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
SALES OF SECURITIES
In February, 1995, each of Bruce S. Betschart and Robert E. Sawyer,
Jr., who were co-founders of TDI, purchased 133,333 shares of our common stock
from us for $10,000 in cash.
In January, 1997, Steven M. Bathgate, Eugene C. McColley and parties
related to them purchased from us an aggregate of 44,000 shares of common stock
in a private offering of TDI for $165,000, or $3.75 per share. In October, 1997,
Mr. Bathgate, Mr. McColley and parties related to them purchased from us units
consisting of two shares of common stock and one warrant to purchase common
stock at an exercise price of $12.00 per share. They purchased for a total of
$530,000 an aggregate of 88,333 shares of common stock and warrants to purchase
an aggregate of 44,167 shares of common stock.
In an offering of TDI in 1999, Eugene McColley purchased for $50,000 a
.5 unit, consisting of a $50,000 promissory note and a warrant to purchase 5,000
shares of our common stock. Margaret M. Bathgate, the spouse of Steven M.
Bathgate, also purchased for $50,000 a .5 unit, consisting of a $50,000
promissory note and a warrant to purchase 5,000 shares. Bathgate McColley
Capital Group, LLC purchased for $30,000 a $30,000 promissory note and a warrant
to purchase 3,000 shares of our common stock. Each warrant is exercisable at a
price of $.75 per share. These units were part of the Company's offering of 14%
notes described under "Use of Proceeds."
In August 1999, Bruce Betschart bought from us for $50,000 a promissory
note in the principal amount of $50,000 and a warrant to purchase 5,000 shares
of our common stock, and Robert E. Sawyer, Jr. purchased for $10,000 a
promissory note in the principal amount of $10,000 and a warrant to purchase
1,000 shares of our common stock. Each warrant is exercisable at a price of
$0.75 per share. These promissory notes and warrants have substantially the same
terms as the offering of 14% notes and warrants described under "Use of
Proceeds."
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<PAGE>
OTHER TRANSACTIONS
In December, 1996, Bruce S. Betschart loaned $100,000 to us in return
for a convertible promissory note. As modified, this Note matures on January 2,
2001 and bears interest at the rate of 10% per annum. This note is convertible
into one share of common stock for each $3.75 of principal of the note. During
1997, we borrowed $114,000 from our officers and directors. Of this amount,
$94,000 was repaid in the same year, without interest.
In July, 1997, Mr. Bathgate, Mr. McColley and parties associated with
them purchased from us in a private offering secured convertible promissory
notes in the original principal amount of $250,000. The purchasers paid the face
amount of these notes in cash, and these notes were converted in 1997 to 85,180
shares of common stock.
Bathgate McColley Capital Group, LLC, of which Mr. Bathgate and Mr.
McColley are the managers and owners, acted as a placement agent in a private
offering of $600,000 of our common stock completed in February, 1997. As a
placement agent fee for this offering, Bathgate McColley Capital received 33,333
shares of our common stock and warrants to purchase 16,000 shares of our common
stock at an exercise price of $3.75 per share and with an expiration date of
February 19, 2002. Bathgate McColley Capital acted as the placement agent for a
sale of $700,000 of common stock in September, 1997 and received 8,333 shares of
TDI in lieu of a fee of $25,000. For acting as a placement agent for an offering
which was made by us from October 1997 to January 1998 and raised $1,431,000
from the sale of units consisting of common stock and warrants to purchase
common stock, Bathgate McColley Capital received warrants to purchase 11,417
shares of common stock at an exercise price of $6.00 per share and with an
expiration date of January 2, 2003. The above-mentioned warrants have been
distributed to Mr. McColley, Mr. Bathgate and other parties related to Bathgate
McColley Capital.
In August, 1999, we issued warrants to purchase 27,667 shares of our
common stock to Bathgate McColley Capital as payment for services as placement
agent for an offering of units. The units consisted of promissory notes due May,
2001 (which are to be converted into our common stock) and warrants to purchase
common stock. The warrants issued to Bathgate McColley Capital have an exercise
price of $3.00 per share and expire five years after their issuance.
All warrants issued for the services of Bathgate McColley Capital as a
placement agent have rights to require registration under the Securities Act of
the shares received upon the exercise of the warrants. Please see for more
information "Description of Capital Stock - Registration Rights."
In September, 1997, we issued an option to Robert T. Bruce for 183,333
shares at an exercise price of $3.00 per share. At that time Mr. Bruce was
elected to serve as a
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<PAGE>
director and our Chief Executive Officer. He has resigned since that time, but
the option remains exercisable for 100,000 shares.
We believe that the transactions summarized above were made on terms no
less favorable than could have been obtained from unaffiliated third parties.
PRINCIPAL STOCKHOLDERS
The following table contains information regarding ownership of our
common stock (the only class of stock outstanding) as of February 29, 2000 and
as adjusted to reflect the sale by us of our common stock in this offering by
(1) all of our directors, (2) our Chairman of the Board and Chief Executive
Officer, (3) our President and Chief Operating Officer, (4) all of our directors
and executive officers as a group, and (5) each shareholder who, to our
knowledge, was the beneficial owner of five percent or more of the outstanding
shares. Unless otherwise indicated, their addresses are the same as our address.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission. Unless otherwise indicated, beneficial
ownership consists of sole voting and investment power as to the shares. In
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares subject to options or warrants that are
beneficially owned by that person and that are currently exercisable or will be
exercisable within 60 days after February 29, 2000 are deemed outstanding, while
those shares are not deemed outstanding for purposes of computing the percentage
ownership of any other person. The following table assumes that the
underwriters' over-allotment option is not exercised.
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT AFTER
NAME AND ADDRESS OF BENEFICIALLY PRIOR OFFERING
BENEFICIAL OWNER OWNED TO OFFERING -------------
- ------------------- ------------ -----------
<S> <C> <C> <C>
Ronald C. Ellington (1) 63,333 4.8% 2.3%
Bruce S. Betschart (1)(2) 166,000 12.8% 6.0%
Robert E. Sawyer, Jr. (1) 139,333 10.9% 5.1%
Charles Douglas (1) 60,445 4.7% 2.2%
John Jenkins (1) 7,499 0.6% .3%
Ann Torre Grant (1) 5,000 0.4% .2%
Peter Roy (1) 5,000 0.4% .2%
Leonard Hawkins 66,666 5.3% 2.4%
Robert Bruce (5) 100,000 7.3% 3.5%
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<PAGE>
Steven M. Bathgate (3)
5350 S. Roslyn, #350
Englewood, CO 80111 285,568 21.6% 10.2%
Eugene C. McColley (4)
5350 S. Roslyn, #350
Englewood, CO 80111 222,068 17% 8%
Pro Futures Bridge
Capital Fund, L.P.
c/o Bridge Capital Partners, Inc.
5350 S. Roslyn, #350 9.5%
Englewood, CO 80111 260,000 20.5%
Babcock & Brown LP (6)
2 Harrison Street, 6th Floor
San Francisco, CA 94105 150,000 10.6% 5.2%
All directors and executive officers as a
group (8 persons) (1) 446,610 31.7% 15.5%
</TABLE>
- ---------------------------
(1) Includes for each person the following shares issuable upon the exercise
within 60 days of options or warrants: 123,333 shares for Mr. Ellington;
51,000 shares for Mr. Betschart; 41,000 shares for Mr. Sawyer; 45,445
shares for Mr. Douglas; 5,833 shares for Mr. Jenkins; 5,000 shares for Ms.
Grant; and 5,000 shares for Mr. Roy and 353,278 shares for directors and
executive officers as a group.
(2) Includes 26,667 shares issuable to Mr. Betschart upon conversion of a
convertible promissory note.
(3) Includes 11,666 shares owned by Steven M. Bathgate and Margaret M.
Bathgate as joint tenants; 83,705 shares owned by Steven M. Bathgate
Delaware Charter KEOGH; 9,583 shares owned by the Bathgate Family
Partnership II, of which Mr. Bathgate is general partner; 82,410 shares
owned by Caribou Bridge Fund, of which Mr. Bathgate is a controlling
member of the Administrator; and 40,371 shares owned by Kiawah Capital
Partners, of which Mr. Bathgate is a general partner. Also includes 12,500
shares underlying warrants held by Caribou Bridge Fund; 4,166 shares
underlying warrants held by Kiawah Capital Partners; and 37,000 shares
underlying warrants held by Mr. Bathgate individually, all as issuable
upon the exercise of such warrants.
(4) Includes 17,039 shares owned by Eugene C. McColley, Delaware Charter IRA;
82,410 shares owned by Caribou Bridge Fund, of which Mr. McColley is a
manager of the Administrator; and 40,371 shares owned by Kiawah Capital
Partners, of which Mr. McColley is a general partner. Also includes 12,500
shares underlying warrants held by Caribou Bridge Fund; 4,166 shares
underlying warrants held by Kiawah Capital Partners; and 21,166 shares
underlying
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warrants held by Mr. McColley individually, all as issuable upon the
exercise of such warrants.
(5) Includes 100,000 shares issuable upon the exercise of options.
(6) We have issued warrants to purchase these shares to Babcock & Brown, LP as
the base compensation for assistance in selling fractional ownership
interests in, or 1,000 hours of use of simulators. See "Business -
Marketing."
All of the common stock set forth in the table above are subject to
lock-up agreements prohibiting the sale or transfer of them for a period of two
years without the written consent of Kashner Davidson Securities Corporation.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 20,000,000 shares of common
stock, no par value, and 10,000,000 shares of preferred stock, no par value.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Subject
to preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends 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 TDI, holders of the
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of common stock have no preemptive rights and no right to convert
their common stock into any other securities. There are no redemption or sinking
fund provisions applicable to the common stock. All outstanding shares of common
stock are, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
A quorum for purposes of a meeting of stockholders consists of a
majority of the shares entitled to vote at the meeting. After a quorum has been
established, a matter is approved by the shareholders if votes cast favoring the
matter exceed the votes cast against the matter. Directors are elected by a
plurality vote, with the nominees having the highest number of votes cast in
favor of their election being elected to the Board of Directors. As a result, a
majority of the outstanding shares has the ability to elect all of our
directors.
As provided in our Articles of Incorporation, our directors may only be
removed for cause. "Cause" is defined as (1) conviction of a felony or plea of
nolo contendere, (2) declaration of unsound mind by order of court, (3) gross
dereliction of duty,
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<PAGE>
(4) commission of any action involving moral turpitude, or (5) commission of an
action which constitutes intentional misconduct or a knowing violation of law if
such action in either event results in a material injury to us. Our Articles
require a high vote of the shareholders to approve major transactions. The
affirmative vote of two-thirds of the shares present and in person or by proxy
at a meeting is required to approve:
- A sale, lease, exchange or other disposition of all or
substantially all of our property and assets, with or without
our good will, other than in the usual and regular course of
our business.
- A plan of merger of TDI with or into another entity, or a
share exchange for which shareholder approval is required.
- Dissolution of TDI.
The limitation on the removal of directors and this high vote requirement could
have the effect of delaying, deferring or preventing a change in control of TDI.
At February 29, 2000, there were 1,268,488 shares of common stock
outstanding and held of record by 74 stockholders.
PREFERRED STOCK
The Board of Directors has the authority, without further vote or
action by the stockholders, to issue up to 10,000,000 shares of preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series. The
issuance of preferred stock could adversely affect the voting power of holders
of common stock and the likelihood that such holders will receive dividend
payments and payments upon liquidation and could have the effect of delaying,
deferring or preventing a change in control of TDI. There are no shares of
preferred stock issued, and we have no present plans to issue any shares of
preferred stock.
WARRANTS AND OPTIONS
For information on our outstanding warrants and options, please see
"Capitalization" on page 20.
REGISTRATION RIGHTS
We have agreed to registration rights for (a) shares of common stock
underlying warrants or convertible notes purchased by investors in previous
private offerings of TDI and (b) warrants, and shares of common stock underlying
warrants, issued to a placement agent for their services in prior offerings. The
securities laws impose limitations on resales by a holder of shares or warrants
acquired originally in some
71
<PAGE>
kinds of private offerings. An effective registration statement under the
Securities Act allows the holder to freely resell the restricted shares on the
public market. The registration rights provide for the payment of expenses of
the registration by us, unless otherwise noted. Existing shareholders who have
these registration rights have entered into lock-up agreements which
nevertheless affect their ability to sell shares of common stock for a period of
time.
Holders of warrants issued as part of units in 1997 have the right to
include shares of common stock, issued upon the exercise of warrants, in our
next registration and to have us use our best efforts to cause the registration
statement to be effective. The registration statement is to remain in effect
until the earlier of (1) the date when all the shares have been sold, (2) one
year after the exercise of the last warrant in the units, or (3) one year after
the expiration date of the warrants in the units. These rights are relevant to
119,167 shares of outstanding common stock.
In July 1997, we sold four convertible promissory notes, which were
converted later in 1997 into 85,197 shares of common stock. The holders of these
shares have the right to include the shares in most registration statements
filed by us. When they are included in a registration statement, the
registration statement is to remain in effect until the shares have been sold.
The registration rights terminate (1) if a holder can make public sales of those
shares pursuant to Rule 144 of the SEC or (2) three years from the date of this
offering.
We have given registration rights to holders of the warrants issued to
Bathgate McColley Capital as the placement agent for several offerings. For a
period of seven years from the date of issuing warrants, we will offer the
holders the right to include the shares issued upon the exercise of the
warrants, or the warrants and underlying shares, in most registration statements
filed by us. In addition, we will cooperate in preparing and signing a
registration statement for the resale of the placement agent warrants or
underlying shares, at the expense of the holders, but this requirement is
limited to one registration in any 12-month period. This registration right is
relevant to 55,419 shares of common stock issuable under the placement agent
warrants.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Under our Amended and Restated Articles of Incorporation and, upon
completion of this offering, there will be approximately 17,263,296 shares of
common stock and approximately 10,000,000 shares of preferred stock available
for future issuance without stockholder approval (except that as part of the
criteria for maintaining a listing on the Nasdaq SmallCap Market, we are
required to obtain stockholder approval of certain issuances of stock). These
additional shares may be utilized for a variety of corporate purposes including
future public offerings to raise additional capital or to facilitate corporate
acquisitions.
One of the effects of the existence of unissued and unreserved common
stock and preferred stock may be to enable the Board of Directors to issue
shares to persons
72
<PAGE>
friendly to current management which could render more difficult or discourage
an attempt to obtain control of TDI by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of our management. Such
additional shares also could be used to dilute the stock ownership of persons
seeking to obtain control of TDI.
The Board of Directors is authorized without any further action by the
stockholders to determine the rights, preferences, privileges and restrictions
of the unissued Preferred Stock. The purpose of authorizing the Board of
Directors to determine such rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The Board of Directors
may issue preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of common stock, and which
could, among other things, have the effect of delaying, deferring or preventing
a change in control of TDI.
We do not currently have any plans to issue additional shares of common
stock or preferred stock other than shares of common stock which may be issued
upon the exercise of options which have been granted or which may be granted in
the future to our employees.
NASDAQ SMALL CAP MARKET
We anticipate that the common stock will be approved for quotation on
the Nasdaq SmallCap Market under the symbol ___.
TRANSFER AGENT
We have appointed American Securities Transfer Incorporated, Denver,
Colorado, as the transfer agent and registrar for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that a significant public market for our
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock in the public market could adversely affect
market prices prevailing from time to time.
After this offering, we will have an estimated total of 2,736,704
shares of outstanding common stock. Of these shares, the 1,200,000 shares sold
in this offering will be freely tradable in the public market without
restriction under the Securities Act, except for any shares held by our
"affiliates," as that term is defined in Rule 144 under the Securities Act. The
remaining 1,536,704 shares of common stock held by existing
73
<PAGE>
stockholders are "restricted securities," as that term is defined in Rule 144
under the Securities Act. All restricted shares were issued and sold by us in
private or limited offering transactions, which relied on exemptions from
securities registration under the Securities Act. Restricted shares may be sold
in the public market only if they are registered or if they qualify for an
exemption from registration, such as Rule 144 or Rule 701 under the Securities
Act.
In addition to the shares described above, at the date of this
prospectus, we had outstanding options, conversion rights and warrants to
purchase an aggregate of 1,043,193 shares of common stock. We intend to issue
options for an additional 125,000,000 shares of common stock to employees
after the completion of this offering. Taking into account this proposed
issuance of options for 125,000,000 shares and the warrants issued in this
offering to the underwriters for 120,000 shares, options and warrants to
purchase a total of 1,288,193 shares of common stock will be outstanding
after this offering, and no shares of common stock will be reserved for
issuance under our stock option plans.
The directors, executive officers and 5% or more beneficial owners of
our shares are signing lock-up agreements which prohibit or limit their transfer
of our common stock for a period of two years.
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned
restricted shares for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (1) 1%
of the number of shares of common stock then outstanding (which will equal
approximately 27,370 shares immediately after this offering); or (2) the average
weekly trading volume of the common stock during the four calendar weeks
preceding the filing of a Form 144. 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 us. Under Rule 144(k), a person
who is not deemed to have been an affiliate of TDI at any time during the three
months preceding a sale, and who has beneficially owned the shares proposed to
be sold for at least two years (including the holding period of any prior owner
except generally an affiliate), is entitled to sell such shares without
complying with the manner of sale, volume limitation, public information or
notice provisions of Rule 144.
Taking into account the shares subject to lock-up agreements, the
number of restricted shares that will be available for sale in the public market
under the provisions of Rules 144 and 144(k) will be as follows:
- shares will be eligible for sale at the closing of this
offering;
- approximately _______ shares will be eligible for sale 365
days after the date of this prospectus; and
74
<PAGE>
- approximately ________ shares will be eligible for sale two
years after the date of this prospectus upon expiration of
lock-up agreements.
The calculation listed above does not take into account any early release from
the lock-up agreements.
We have outstanding registration rights as described under "Description
of Capital Stock." Registration of any shares under the Securities Act pursuant
to the outstanding registration rights would result in such shares becoming
freely tradable without restriction after the lock-up agreements expire.
Within 90 days following the effectiveness of this offering, we plan
to file a registration statement on Form S-8 registering shares of common
stock subject to outstanding options or reserved for future issuance under
our stock plans. As of the date of this prospectus, options to purchase a
total of 601,277 shares were outstanding and we intend to issue options for
an additional 125,000 shares after this offering as mentioned above.
Subject to expiration of the lock-up agreements, common stock issued upon
exercise of outstanding vested options, other than common stock issued to our
affiliates, would be available for immediate resale in the open market.
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, the underwriters named below, for which Kashner Davidson Securities
Corporation is serving as a representative, have severally agreed to purchase
from us, an aggregate of 1,200,000 shares of common stock at the initial public
offering price, less the underwriting discounts and commissions, set forth on
the cover page of this prospectus. The number of shares of common stock that
each underwriter has agreed to purchase is set forth opposite its name below:
75
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ------
<S> <C>
Kashner Davidson Securities Corporation.......................................... _____
Total............................................................................ 1,200,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock are subject to certain
conditions, including the absence of any material adverse change to us and the
receipt of certificates, opinions and letters from us, our counsel and
independent auditors. The underwriters are obligated to purchase all of the
shares of common stock offered by this prospectus (other than those covered by
the over-allotment option described below), if any are purchased.
The representative of the underwriters has advised us that the
underwriters propose initially to offer the common stock to the public at the
initial public offering price set forth on the cover page of this prospectus
and to certain dealers at such price less a concession not in excess of
$____________ per share, and that the underwriters and such dealers may not
reallow any further discounts on sales to other dealers. The initial public
offering price and the concessions and discount to dealers may be changed by
the representative after the initial public offering.
We have granted an option to the representative, expiring at the close
of business on the 45-day period after the date of this prospectus, to purchase
up to an additional 180,000 shares on the same terms as set forth in this
prospectus, including the initial public offering price. The representative may
only exercise the option (in whole or in part) to cover over-allotments incurred
in connection with the sale of common stock in this offering.
The representative has advised us that the underwriters do not expect
any sales to accounts for which any of the underwriters will exercise discretion
as to such sale.
76
<PAGE>
The underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with regulations of the Securities and Exchange Commission. Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the securities in
the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representative to reclaim a
selling concession from a syndicate member when the securities originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the common stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq Small Cap Market or otherwise
and, if commenced, may be discontinued at any time.
Neither TDI nor the underwriters can predict the effect that the
transactions described above may have on the price of the common stock. In
addition, neither TDI nor the underwriters represent that the underwriters will
engage in such transactions. If commenced, such transactions may be discontinued
at any time without notice. The underwriters are not obligated to make a market
in the common stock and if they do so may discontinue making a market at any
time. There is no assurance an active trading market will ever develop for the
common stock.
Upon completion of this offering, we will sell to the representative
for $10.00 warrants to purchase 120,000 shares of common stock. The
representative's warrants will become exercisable immediately after the
completion of this offering at a per share exercise price equal to 120% of the
initial public offering price and will expire four years from the date of this
prospectus. The representative's warrants and underlying shares of common stock
will be restricted from sale, transfer, assignment or hypothecation for a period
of one year from the date of this prospectus, except to the representative,
underwriters, selling group members and their officers or partners. During the
exercise period, holders of the representative's warrants are entitled to
certain demand and incidental rights with respect to the shares of common stock
issuable upon exercise of the representative's warrants. The common stock
issuable on exercise of the representative's warrants is subject to adjustment
in certain events to prevent dilution, including issuances of shares at prices
below fair market value.
We will pay the representative a nonaccountable expense allowance of 3%
of the gross proceeds of the offering, which will include proceeds from the
over-allotment option, if exercised. The representative's expenses in excess of
the nonaccountable expense allowance, including their legal expenses, will be
borne by the representatives. We have paid $25,000 to the representative as an
advance for these expenses.
77
<PAGE>
At the closing of this offering, we will enter into an agreement with
Kashner Davidson Securities Corporation to retain Kashner Davidson as a
management and financial consultant for 24 months at a fee of $96,000 payable at
the closing of this offering. In the underwriting agreement for this offering,
we have provided that we and any of our subsidiaries will grant to Kashner
Davidson a right of first refusal for a period of two years from the date of
this prospectus for any public or private offering of securities to raise
capital for us. This right of first refusal is based on Kashner Davidson meeting
the terms of other bona fide offers or fundings by other entities. For a
period of one year from the date of this offering, we have agreed to not
issue any shares of our stock or warrants or options for our stock, without
the consent of Kashner Davidson.
We have also agreed that we will, for a period of two years from the
closing of this offering, invite a designee of Kashner Davidson to attend all
meetings of the Board of Directors as an advisor. We will hold board meetings at
least quarterly. The underwriter's advisor at the meeting will not be entitled
to vote and will not receive compensation for attendance at the board meetings,
except reimbursement of travel expenses.
Further, we have agreed to use our best efforts to have officers,
directors, employees and five percent shareholders use Kashner Davidson for any
sales pursuant to SEC Rule 144 or any registration statement covering resales of
shares by those persons, that we will use Kashner Davidson as an agent for any
investment plan which we may establish in the future if Kashner Davidson can
provide the same services at the same costs as the best provider and that we
will invest any part of the net proceeds of this offering through Kashner
Davidson if we use an investment bank for this purpose.
We have agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, and to
contribute to payments which the underwriters may be required to make regarding
these liabilities.
The officers, executive directors and 5% or more beneficial
shareholders of TDI have agreed with the underwriters that, without the prior
written consent of Kashner Davidson Securities Corporation on behalf of the
underwriters, they will not publicly sell or otherwise dispose of any common
stock or any securities convertible into common stock for a period of two years
following the date of this prospectus.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price has been determined by
negotiations among us and the representative. Among the principal factors
considered in determining the initial public offering price of the common stock
were our history and prospects, the industry in which we operate, the abilities
of our management, the status of our products and proposed services, our past
and present operating results, and the general condition of the securities
markets at the time of this offering.
The estimated initial public offering price per share set forth on the
cover of this preliminary prospectus is subject to change as a result of the
above and other factors.
78
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of common stock being
offered hereby will be passed upon for us by Holland & Hart LLP, Denver,
Colorado. Certain legal matters for the underwriters will be passed upon by
McAfee & Taft A Professional Corporation, Oklahoma City, Oklahoma.
EXPERTS
Our audited financial statements included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, a
registration statement on Form SB-2 under the Securities Act of 1933 with
respect to the common stock offered by this prospectus. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedules. For further information about us and our common stock, please
refer to the registration statement and the exhibits and schedules filed.
Statements contained in this prospectus as to the contents of any contract or
document filed as an exhibit to the registration statement are qualified by
reference to such exhibit as filed.
A copy of the registration statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the SEC.
Information regarding the operation of the public reference room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains a Website that contains
registration statements, reports, proxy and other information regarding
registrants that file electronically with the SEC. The address of this Website
is sec.gov.
79
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
BALANCE SHEET, as of December 31, 1999 F-3
STATEMENTS OF OPERATIONS, for the years ended December 31, 1998 and 1999 F-5
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT,
for the years ended December 31, 1998 and 1999 F-6
STATEMENTS OF CASH FLOWS, for the years ended December 31, 1998 and 1999 F-7
NOTES TO FINANCIAL STATEMENTS F-10
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Training Devices International, Inc.:
We have audited the accompanying balance sheet of TRAINING DEVICES
INTERNATIONAL, INC. (a Colorado corporation) as of December 31, 1999, and the
related statements of operations, changes in stockholders' equity (deficit) and
cash flows for the years ended December 31, 1998 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Training Devices International,
Inc. as of December 31, 1999, and the results of its operations and its cash
flows for the years ended December 31, 1998 and 1999 in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Training
Devices International, Inc. will continue as a going concern. As discussed in
Note 1 to the financial statements, Training Devices International, Inc. has
suffered recurring losses and has a net capital deficiency that raises
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 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Arthur Andersen LLP
Denver, Colorado
March 13, 2000.
F-2
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
------------------------------------
BALANCE SHEET
-------------
DECEMBER 31, 1999
-----------------
ASSETS
------
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 96,437
Accounts receivable - trade 3,850
Simulators-in-progress 391,264
Prepaid expenses and other current assets 9,645
Earned income in excess of billings 36,878
Deferred debt issuance costs, net of accumulated amortization
of $91,143 107,156
------------
Total current assets 645,230
------------
SIMULATORS-IN-PROGRESS, net of current portion 245,330
PROPERTY, PLANT AND EQUIPMENT:
Leasehold improvements 110,488
Software and licenses 93,150
Furniture and equipment 218,452
------------
422,090
Less - Accumulated depreciation and amortization (150,994)
------------
Property, plant and equipment, net 271,096
------------
DEPOSITS 7,488
DEFERRED OFFERING COSTS 237,751
------------
Total assets $1,406,895
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
------------------------------------
BALANCE SHEET
-------------
DECEMBER 31, 1999
-----------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 507,271
Accrued expenses 550,172
Bridge loan payable (Note 12) 584,441
Accrued losses on projects 145,389
Note payable to Aims (Note 13) 526,000
Deferred revenue - Aims 476,250
Other notes payable 10,329
-------------
Total current liabilities 2,799,852
-------------
CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES (Note 10) 120,000
BRIDGE LOAN INCENTIVE OBLIGATION 114,468
DEFERRED REVENUE - AIMS, net of current portion 646,762
-------------
Total liabilities 3,681,082
-------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' DEFICIT
Preferred Stock, no par value, 10,000,000 shares
authorized, none outstanding -
Common stock, no par value, 20,000,000 shares
authorized, 1,268,488 issued and outstanding 4,054,722
Deferred compensation (67,196)
Accumulated deficit (6,261,713)
-------------
Total stockholders' deficit (2,274,187)
-------------
Total liabilities and stockholders' deficit $ 1,406,895
=============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-4
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
------------------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1999
--------- ---------
<S> <C> <C>
REVENUES $ 1,498,192 $ 1,028,569
COST OF SALES 2,227,740 1,419,148
------------ ------------
Gross margin (loss) (729,548) (390,579)
SELLING, GENERAL AND ADMINISTRATIVE 832,249 1,286,559
------------ ------------
LOSS FROM OPERATIONS (1,561,797) (1,677,138)
OTHER EXPENSE (INCOME):
Interest expense 20,200 596,225
Interest income (10,387) (7,683)
Other expense 66,329 -
Offering costs - 125,530
------------ ------------
Total other expense, net 76,142 714,072
------------ ------------
NET LOSS $(1,637,939) $(2,391,210)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (1.29) $ (1.89)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 1,267,453 1,268,516
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Common Stock Accumu-
-------------------------- Deferred lated
Shares Dollars Compensation Deficit Total
------------ ------------ --------------- ------------- ----------------
------------ ------------ --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1997 1,242,697 $2,937,232 $ - $(2,232,564) $ 704,668
Additional shares issued in
January 1998 from December
1997 private placement 25,833 155,000 - - 155,000
Stock offering costs - (15,400) - - (15,400)
Issuance of Common Stock
options at less than fair
market value - 120,500 (120,500) - -
Amortization of deferred
compensation - - 13,389 - 13,389
Net loss - - - (1,637,939) (1,637,939)
------------ ------------ ----------- ------------- --------------
BALANCES, December 31, 1998 1,268,530 3,197,332 (107,111) (3,870,503) (780,282)
Common stock warrants issued
for services - 3,750 - - 3,750
Common stock warrants issued
in connection with Bridge
Loans payable - 578,350 - - 578,350
Issuance of Common Stock
options at less than fair
market value - 275,500 (275,500) - -
Repurchase of fractional shares (42) (210) - - (210)
Amortization of deferred
compensation - - 315,415 - 315,415
Net loss - - - (2,391,210) (2,391,210)
------------ ------------ ----------- ------------- --------------
BALANCES, December 31, 1999 1,268,488 $4,054,722 $ (67,196) $(6,261,713) $(2,274,187)
============ ============ =========== ============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,637,939) $(2,391,210)
Adjustments to reconcile net loss to cash
used in operating activities-
Depreciation and amortization 50,583 77,743
Loss on disposal of assets 3,249 -
Loss on Aims simulator - 108,034
Amortization of debt issuance costs - 91,143
Amortization of deferred compensation 13,389 315,415
Accretion in connection with Bridge Loan payable - 183,051
Accretion of Bridge Loan incentive payments - 114,468
Accretion of note payable to Aims - 74,013
Common stock warrants issued for services - 3,750
Changes in operating assets and liabilities-
Earnings in excess of billings 270,286 (36,878)
Accounts receivable (79,172) 85,322
Prepaid expenses and other current assets 5,121 1,345
Simulators-in-progress - (581,595)
Deposits - 2,079
Accounts payable (88,225) 89,839
Accrued expenses 308,268 182,617
Billings in excess of earnings 328,717 (367,282)
Accrued losses on contracts 308,416 (177,397)
----------- -----------
Cash used in operating activities (517,307) (2,225,543)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1999
------------- -------------
<S> <C> <C>
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment $ (210,326) $ (80,135)
Proceeds from sale of fixed assets 650 -
------------- -------------
Cash used in investing activities (209,676) (80,135)
------------- -------------
FINANCING ACTIVITIES:
Restricted cash 47,431 19,050
Net proceeds from private placements of Common Stock 139,600 -
Proceeds from Bridge Loan and other financing - 890,100
Payment of deferred debt issuance costs - (88,659)
Deferred offering costs - (57,653)
Proceeds from Aims note - 1,500,000
Payments on other notes payable - (34,671)
------------ ----------
Cash provided by financing activities 187,031 2,228,167
------------ ----------
NET DECREASE IN CASH (539,952) (77,511)
CASH, beginning of the year, net of restricted portion 713,900 173,948
------------ ----------
CASH, end of the year, net of restricted portion $173,948 $ 96,437
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 9,737 $ 36,086
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
NON-CASH TRANSACTIONS:
During 1998, the Company acquired fixed assets of $13,530 through a
capital lease payable.
During the year ended December 31, 1999, the Company paid placement agent
fees by issuing 17,000 Common Stock Warrants valued at $55,080 in May
and 10,666 Common Stock warrants in July valued at $34,560.
During 1999, the Company issued a note payable of $45,000 in settlement
of a lease payable at December 31, 1998.
During 1999, the Company incurred $20,000 of loan fees related to the
note payable to Aims which was recorded as an increase to the note
balance and deferred debt issuance costs.
During 1999, the Company recorded deferred offering costs of $180,098,
which were unpaid as of December 31, 1999 and included in accounts
payable.
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. SUMMARY OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES:
A summary of the business and significant accounting policies of Training
Devices International, Inc. (the "Company" or "TDI") follows:
NATURE OF BUSINESS
TDI was formed on January 19, 1995 as a Colorado corporation. The Company
develops and manufactures technology based flight training products for the
commercial aviation market. The products are full motion flight simulators and
flight training devices for the training of pilots.
GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the years ended December 31, 1998 and 1999, the Company
incurred losses of $1,637,939 and $2,391,210 respectively, and at December 31,
1999, its current liabilities exceed its current assets by $2,154,622. These
factors, among others, indicate that there is substantial doubt as to whether
the Company will be able to continue as a going concern.
The Company is proceeding with plans for an Initial Public Offering ("IPO")
with the Securities and Exchange Commission to sell 1.2 million shares with
estimated net proceeds, after all costs and expenses, of approximately $6.7
million. It has executed a Letter of Intent with an Underwriter and expects
to file an amendment to its registration statement with the Securities and
Exchange Commission in March 2000. There can be no guarantee that such
offering will be completed.
Management continues to work on a variety of plans to infuse capital into the
Company. In September 1999, the Company completed a $2,020,000 loan agreement
with Aims Continuing Education Authority in Greeley, Colorado. These funds
were used, in part, to commence work on a Beech 1900 full flight simulator to
be used in the Company's NEXUSim program. This loan matures on December 1,
2000.
The Company received a committment for a $2,500,000 loan in December, 1999
from an individual (Note 15). This loan enabled the Company to begin production
on a second Beech 1900 full flight simulator to be used in the Company's
NEXUSim program. This loan will mature on February 1, 2001.
F-10
<PAGE>
The Company was successful in obtaining $2,400,000 in vendor financing from two
major component manufacturers. The Company will pay these amounts after
certification is received from the Federal Aviation Administration (FAA).
The Company is also in negotiations with two funding sources that, if completed,
could provide $12,000,000 in additional debt financing to allow the Company to
start manufacturing a regional jet for its NEXUSim program.
RISK FACTORS
In addition to the going concern matter noted above, the Company also faces a
number of other risks and uncertainties. The Company's proposed change in
business plan to expand into higher production volumes of simulators and into
management of training centers, is a business that current management has no
experience with. The Company will need cash to finance the manufacturing costs
of simulators for the NEXUSim training centers prior to the sale of fractional
ownership interests and any delays in the manufacturing schedule could have a
material adverse effect on the Company's business, cash flow, financial
condition and operating results. The Company is dependent upon a limited number
of suppliers, and although the Company is aware of alternative suppliers, a
switch in suppliers can delay the completion of a simulator. A change in
government regulations could increase the Company's cost of doing business or
cause it to change the way it conducts its business. The timing of sales under
the NEXUSim program is largely dependent upon the timing of receipt of the
required FAA approval.
The Company has expended, and will continue to expend, significant resources
marketing its NEXUSim product and identifying potential customers. Management
believes, but cannot guarantee, that its product will be accepted by the
marketplace in sufficient quantities to provide for profitable operations at
some future date. The NEXUSim products (i.e., simulators) are being built to
specifications of the Company' and will be subject to FAA approval before being
sold. The Company's ability to achieve and attain profitable operations and
positive cash flow from operations depends upon various factors including, among
others, the costs of and resources for developing and marketing its product, the
extent and timing of market acceptance of the Company's product, competitive
factors and other factors, certain of which are beyond the Company's control. In
order to execute its business plan, the Company will require additional public
or private debt or equity financing. There can be no guarantees that such
financing will be available in the future.
In the manufacture of simulators for unaffiliated third parties, the Company has
served, and will continue in the future to serve, a few customers or possibly
one customer at any particular time. The NEXUSim program will broaden the base
of customers, with up to seven customers for each simulator. These customers
will also utilize the training center containing their simulator.
Because of the limited number of customers at this time and for the foreseeable
future, the Company is dependent upon maintaining and satisfactorily serving its
customers. The loss of any one customer, because of a bankruptcy of the
customer, cancellation, delay or other events, could materially and adversely
affect present and future revenues. If the loss of a customer relates to
performance, that loss could also have a negative impact on the Company's
reputation in the industry.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all cash balances and highly liquid
investments with original maturities of three months or less.
F-11
<PAGE>
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
The majority of the Company's contracts have been long-term and fixed price
in nature. The Company utilized the percentage-of-completion method of
accounting for all projects in which the Company has a third party
manufacturing contract. There were two such contracts outstanding at December
31, 1999.
Revenues recognized under the percentage-of-completion method are measured
primarily by the cost-to-cost method. The amount of revenue recognized is not
related to the progress billings to customers. Contract costs include all direct
labor costs and associated indirect overhead costs related to contract
performance. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
Contracts in progress are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1999
------------------------------------------
<S> <C> <C>
Costs incurred on contracts in progress $2,459,683 $2,138,054
Estimated earnings, net of losses (356,060) (181,176)
------------ ------------
Revenues recognized from contracts in progress 2,103,623 1,956,878
Less: billings to date (2,470,905) (1,920,000)
------------ ------------
Earnings in excess of billings $ - $ 36,878
============ ============
Billings in excess of earnings $ (367,282) $ -
============ ============
</TABLE>
The Company initiated two full flight simulator projects during the fourth
quarter of 1999, under the Company's NEXUSim programs. Revenues will not be
recognized during the construction of these assets until the fractional
shares are sold and ownership of the fractional shares is transferred. The
costs incurred to build the simulator are capitalized as
simulators-in-progress, as shown on the accompanying balance sheet. As of
December 31, 1999, the Company recognized a loss of $108,034 due to the
projection that production costs of the Aims NEXUSim full flight simulator
will exceed revenues from the future sale of the fractional shares.
SIMULATORS-IN-PROGRESS
Simulators-in-progress are stated at the lower of cost or market. The elements
of cost include direct labor and materials, variable overhead and the full
absorption of fixed manufacturing overhead. Cost is computed on an identified
cost basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
is provided using the straight-line method over the estimated useful lives.
Useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements 5 years
Software 3 years
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Data licenses 5 years
Furniture and equipment 5 to 7 years
</TABLE>
Leasehold improvements are depreciated over the shorter of the remaining term of
the associated lease or the life of the asset.
When assets are retired or otherwise disposed of, the cost of the assets and the
related accumulated depreciation are removed from the accounts. Any gain or loss
upon retirement is reflected in operations in the year of disposition.
DEFERRED OFFERING COSTS
Deferred offering costs are comprised of costs incurred by the Company related
to the current proposed IPO activities. Such costs represent legal and other
professional fees. Upon successful completion of the IPO, these costs will be
offset against the IPO proceeds. Should the offering not be successful, these
deferred offering costs will be expensed. During 1999, the Company expensed
costs of $125,530 related to a previous IPO effort.
DEFERRED DEBT ISSUANCE COSTS
Debt issuance costs related to obtaining the Bridge Debt Financing (Note 12) and
the Note payable to Aims (Note 13) have been deferred and are being amortized
over the term of the debt instruments.
PURCHASED SOFTWARE
Software licenses purchased by the Company are capitalized and amortized over
the estimated useful life of three years.
WARRANTIES
As a part of all contracts, the Company provides a warranty on its product. The
warranties cover defects in design, materials and workmanship for a period
ranging from 3 to 12 months. Estimated warranty costs are recognized as a part
of the total cost of each contract, and are a component of accrued expenses in
the accompanying financial statements.
INCOME TAXES
A current provision for income taxes is recorded for actual or estimated amounts
payable or refundable on tax returns filed or to be filed for each year.
Deferred income tax assets and liabilities are recorded for the expected future
income tax consequences, based on enacted tax laws, of temporary differences
between the financial reporting and tax bases of assets and liabilities and
carryforwards. The overall change in deferred tax assets and liabilities for the
period measures the deferred tax expense for the period. Effects of changes in
tax laws on deferred tax assets and liabilities are reflected as adjustments to
tax expense in the period of enactment. Deferred tax assets are recognized for
the expected future tax effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets are reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not based on current circumstances, are not expected to
be realized.
F-13
<PAGE>
ASSET IMPAIRMENT
TDI reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Assets which are held and used in operations would be impaired if
the undiscounted future cash flows were less than the net book value. Impairment
losses would be recorded for the difference between the carrying value and the
fair market value of the long-lived asset.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and include salaries,
supplies, and other direct costs, including a related overhead allocation.
Research and development costs totaled $0 and $208,017 during the years ended
December 31, 1998 and 1999, respectively.
ADVERTISING
The Company expenses advertising as incurred. These amounts totaled $2,733 and
$16,633 for the years ended December 31, 1998 and 1999, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS PER SHARE
Basic earnings per share is computed based on the monthly weighted-average
number of common shares outstanding during each period. Diluted earnings per
share is computed based on the monthly weighted-average number of common shares
outstanding during the periods and the assumed exercise or conversion of
securities convertible into common stock for which the effect of conversion or
exercise would be dilutive (stock options and warrants) using the treasury stock
method.
The Company has excluded the weighted-average effect of common stock issuable
upon exercise of all warrants, options and convertible notes payable to related
parties from the computation of diluted earnings per share as the effect of all
such securities is anti-dilutive for all periods presented.
The shares excluded are as follows:
<TABLE>
<CAPTION>
<S> <C>
For the years ended December 31,
1998 (including 32,000 shares from convertible notes) 377,028
1999 (including 32,000 shares from convertible notes) 969,751
</TABLE>
SEGMENT INFORMATION
F-14
<PAGE>
In accordance with the provisions of SFAS No. 131, the Company has determined
that it does not have separately reportable operating segments.
COMPREHENSIVE LOSS
Comprehensive loss for the years ended December 31, 1998 and 1999 is the same as
the net loss as presented in the accompanying statements of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), and in June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB 133" ("SFAS No.137"). SFAS No. 137 requires the Company to adopt SFAS
No. 133 for all quarters in the year ended December 31, 2001. SFAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. The Company is currently evaluating the impact of this statement on
its financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"). SAB 101 explains the
SEC staff's general framework for revenue recognition by stating the criteria
that must be met in order to recognize revenue. The Company will adopt SAB 101
in the first quarter of fiscal year 2000. Management of the Company believes
that the adoption of SAB 101 will not have a material impact on its financial
statements, however, the final evaluation of SAB101 is not complete.
2. SIGNIFICANT CUSTOMERS:
During 1999, the Company had completed one flight simulator with another four in
progress as of year-end. The following table details the customers accounting
for greater than 10% of total revenues in each period presented:
<TABLE>
<CAPTION>
1998 1999
--------------------------------------- ----------------------------------
Revenues % of Revenues Revenues % of Revenues
------------------ ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Customer A $1,013,876 68% $828,974 88%
Customer B 10,051 1% 103,977 11%
Customer C 252,274 17% 11,209 1%
Customer D 179,128 12% - -
</TABLE>
3. LEASE COMMITMENTS:
F-15
<PAGE>
The Company has entered into certain non-cancelable leases which are being
accounted for as operating leases.
Future minimum rental payments for the leases described above are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000 $ 86,981
2001 88,218
2002 89,622
2003 14,976
2004 -
----------
$279,797
==========
</TABLE>
Rent expense for operating leases amounted to $99,878 and $127,091 for the years
ended December 31, 1998 and 1999, respectively.
The Company will begin leasing space for the training center at Aims Community
College when the simulator is completed (see Note 13). The training center is
expected to open in late 2000, and the lease has an initial term of 10 years.
Annual payments over the term of the lease will be as follows: $127,000 in years
one through four, $137,000 in years five through seven, and $147,000 in years
eight through ten. Lease expense will be recorded on a straight-line basis over
the ten year period.
4. INCOME TAXES:
The Company has had losses since its inception, and therefore has paid no
federal or state income taxes. As of December 31, 1999, the Company had an
accumulated net operating loss ("NOL") carryforward for income tax purposes
of approximately $5,970,000. The carryforward is subject to examination by
the tax authorities and expires at various dates from 2017 to 2019. The Tax
Reform Act of 1996 contains provisions that may limit the use of the
available NOL carryforwards.
Deferred tax assets and liabilities as of December 31, 1999 consist of the
following:
<TABLE>
<S> <C>
Current deferred tax assets (liabilities):
Accrued losses on projects $ 55,248
Deferred compensation 119,953
-------------
175,201
Less valuation allowance (175,201)
-------------
Total current deferred tax assets (liabilities) -
-------------
Non-current deferred assets (liabilities):
Net operating loss carryforwards $ 2,268,665
F-16
<PAGE>
Depreciation differences 1,986
-------------
2,270,651
Less valuation allowance (2,270,651)
-------------
Total non-current deferred tax
assets (liabilities) -
-------------
Net deferred tax assets $ -
=============
</TABLE>
Included in the Company's deferred tax assets is a benefit resulting from the
accumulated NOL and other previously unrecognized tax benefits. Recognition of
the NOL and these benefits requires future taxable income, the attainment of
which is uncertain, and therefore, a valuation allowance has been established
for the entire balance. The above NOL and deferred tax asset valuation allowance
is reflected because of recurring losses suffered by the Company and the fact
that there is substantial doubt as to whether the Company will be able to
generate sufficient income before the NOL's expire to realize the tax benefit of
these losses. The increase in the valuation allowance is a result of an increase
in deferred tax assets, which includes the NOL.
The Company recorded income tax expense and benefit for the years ended December
31 as follows:
<TABLE>
<CAPTION>
1998 1999
----------------- --------------
<S> <C> <C>
Current tax benefit $(447,843) $(802,535)
Deferred tax benefit (150,634) (102,904)
Valuation provision 598,477 905,439
------------ -----------
$ - $ -
------------ -----------
============ ===========
</TABLE>
The differences in income taxes provided and the amounts determined by applying
the federal statutory rate to income taxes result from the following:
<TABLE>
<CAPTION>
1998 1999
----------------- --------------
<S> <C> <C>
Income tax benefit using federal rate of 34% $(556,900) $(813,011)
State income tax benefit, net (65,517) (95,649)
Meals, entertainment and other 23,940 3,221
Change in valuation allowance 598,477 905,439
----------- -----------
$ - $ -
============== =============
</TABLE>
5. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable and cash. Trade
accounts receivable are typically secured by the
F-17
<PAGE>
underlying flight simulator and the Company assesses the credit of its customers
as a part of the contracting process. The Company's cash consists of demand
deposits and interest bearing accounts, all maintained at high quality financial
institutions. Total account balances may periodically exceed insured limits for
short periods of time; however, management believes that the Company's cash is
subject to minimal credit risk.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value due to short-term maturaties
of these assets and liabilities. The carrying value of the note payable to Aims
approximates fair value as this financing was obtained near the end of 1999. The
carrying value and estimated fair value of the Company's convertible notes
payable to related parties and bridge debt financing, which includes the bridge
debt payable, accrued interest and bridge debt incentive obligations, are as
follows:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------
Carrying Value Fair Value
-------------- ----------
<S> <C> <C>
Convertible notes $120,000 $224,000
Bridge debt financing $700,629 $1,877,510
</TABLE>
The fair value is estimated based on the current conversion rates offered to
the note holders, and the corresponding estimated fair value of stock that
can be obtained through the exercising the conversion feature.
7. STOCKHOLDERS' EQUITY:
The Company's authorized capital stock consists of 20,000,000 shares of common
stock, no par value, and 10,000,000 shares of preferred stock, no par value. The
holders of common stock are entitled to one vote for each share held of record
on all matters submitted to a vote of the stockholders. Subject to preferences
of any outstanding preferred stock, holders of common stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available. In the event of a liquidation, dissolution or
winding up of the Company, holders of the common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding preferred stock. Holders of common stock have
no preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are, and all shares of
common stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable. Upon issuance of preferred stock the Company is
authorized to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series of the designation of such series.
Certain provisions included in the corporate documents could make it more
difficult for a third party to acquire the company. The corporate documents
require a two-thirds vote of shareholders for a merger or a sale of
substantially all of its assets, the staggered election of directors and the
availability for three-
F-18
<PAGE>
year terms, the requirement that directors can only be removed for cause and the
availability of a large number of authorized but unissued shares of common and
preferred stock.
8. COMPANY STOCK OPTION PLANS:
The 1997 Incentive and Nonstatutory Stock Option Plan and the 1999 Stock Option
Plan (collectively, the "Plans") authorize the Company to grant stock options to
acquire up to 334,500 and 400,000 shares, respectively, of the Company's Common
Stock. The Company accounts for its Plans under Accounting Principles Board
Opinion No. 25 ("APB No. 25"), Accounting for Stock Issued to Employees. Under
APB No. 25 compensation expense is recognized for the difference between the
fair market value of the stock and the exercise price of the option at the date
of grant. During 1998, 80,333 options were granted, which vest over three years
from the grant date, with an exercise price below the estimated fair market
value, and deferred compensation of $120,500 was recorded in the accompanying
statement of changes in stockholders' deficit. In 1999, 63,333 options, which
vested 90 days subsequent to issuance, were granted with an exercise price below
the estimated fair market value. The Company recorded deferred compensation
totaling $275,500 in the accompanying statement of changes in stockholders'
deficit during 1999. For the year ended December 31, 1998 and 1999, the Company
recognized $13,389 and $315,415, respectively, of compensation expense.
In September 1997, the Company issued options to an individual for the purchase
of 183,333 shares of Common Stock at an exercise price of $3.00 per share. At
that time, this individual was elected to serve as a Director and Chief
Executive Officer of the Company. This individual has since resigned and as of
December 31, 1999, options for the purchase of 100,000 shares Common Stock
remain outstanding and exercisable.
Had compensation cost for the Plan been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net loss
and basic and diluted loss per share would have been increased to the following
proforma amounts:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net loss
As reported $(1,637,939) $(2,391,210)
=========== ===========
Pro forma $(1,669,596) $(2,845,504)
=========== ===========
Basic and diluted loss per share
As reported $ (1.29) $ (1.89)
=========== ===========
Pro forma $ (1.32) $ (2.24)
=========== ===========
</TABLE>
The following table summarizes activity with respect to outstanding Common Stock
options for 1998 and 1999:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price/Share
---------- -------------
F-19
<PAGE>
<S> <C> <C>
Outstanding at December 31, 1997 146,866 $ 3.00
Granted 82,000 4.50
Exercised - -
Forfeited (30,422) 3.08
---------- ------
Outstanding at December 31, 1998 198,444 3.61
Granted 476,833 (1) 4.51
Exercised - -
Forfeited (2,777) 5.83
---------- ------
Outstanding at December 31, 1999 672,500 $ 4.24
======= =====
Shares exercisable at December 31, 1999 432,779 $ 3.74
======= ====
</TABLE>
(1) In March 2000, the terms of certain options granted during 1999
were modified (Note 15).
The weighted average fair value of the options granted during 1998 and 1999 in
total (and per share) was $209,542 ($2.56 per share) and $890,267 ($1.87 per
share), respectively.
The weighted average fair value of each option grant is estimated on the date of
grant using the minimum value method with the following assumptions: risk-free
interest rates of 4.54% to 6.22% vesting over various terms with a maximum
vesting period of three years, the term of the option equals the contract
period, no expected volatility, and no expected dividends.
The following table sets forth the Company's Common Stock options outstanding,
exercise price, weighted average remaining contractual lives and the number of
Common Stock options exercisable as of December 31, 1999.
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
Weighted
Exercise Number Average Remaining Number
Price Outstanding Contractual Life Exercisable
- -------------------- --------------------- --------------------------- ------------------------
<S> <C> <C> <C>
$3.00 118,101 2.66 years 112,886
$4.50 119,233 3.88 years 26,560
$0.15 63,333 4.33 years 63,333
$6.75 51,833 5.12 years -
$5.00 320,000 5.56 years 230,000
------- -------
672,500 432,779
======= =======
</TABLE>
F-20
<PAGE>
9. COMMON STOCK WARRANTS:
The following table summarizes activity with respect to outstanding Common Stock
warrants for 1998 and 1999:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price/Share
--------- -------------
<S> <C> <C>
Warrants outstanding and exercisable at
December 31, 1997 and 1998 146,584 $ 10.62
Warrants issued to investors in connection with
Bridge Debt Financing 89,000 0.75
Warrants issued to placement agent in connection with
Bridge Debt Financing 27,666 3.00
Warrants issued to non-employees of the Company 2,000 2.75
--------- -------
Warrants outstanding and exercisable as of
December 31, 1999 265,250 $ 6.46
======= ======
</TABLE>
The warrants issued to the non-employees related to consulting services rendered
during 1999. These warrants were fully vested upon issuance. The fair value of
these warrants was recorded as increase in selling, general and administrative
expense and common stock in the accompanying financial statements.
The weighted average fair value of the warrants issued in 1999 totaled $582,100
and was estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: risk-free interest rate of 7.25% vesting
over various terms with a maximum vesting period of three years, expected
volatility of 75%, and no expected dividend yields.
10. RELATED PARTY TRANSACTIONS:
In December 1996, the Company borrowed $100,000 from a member of management to
help meet operating obligations. The Company issued a convertible note ("1996
Note") evidencing the loan. The terms of the 1996 Note provide that it is due
and payable on January 2, 2001, and it shall bear interest at the rate of 10%
until paid. The 1996 Note is convertible into shares of Common Stock at the rate
of one share for each $3.75 of principal and interest converted. The balance of
$100,000 was outstanding as of December 31, 1999 and is included in notes
payable to related parties in the accompanying balance sheet.
During 1997, the Company borrowed funds from its officers and directors, and all
but $20,000 was repaid during 1997. The remaining $20,000, payable to one
individual, was converted into a convertible promissory note ("1997 Note") with
terms identical to those of the 1996 Note. The entire balance is outstanding as
of December 31, 1999 and is included in notes payable to related parties in the
accompanying balance sheet. This amount was repaid during 2000.
F-21
<PAGE>
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In the normal course of business, the Company is also a party to various
disputes, claims and legal actions. Provisions for costs and losses relating to
these matters are made as management deems them appropriate. Management is of
the opinion that the outcome of such actions will not have a material adverse
effect on the Company's financial position or results of operations.
SELF INSURANCE
The company maintains general liability insurance. Policy limits of TDI's
product liability insurance at December 31, 1999, were $1 million per
occurrence with an aggregate maximum of $2 million. Should the Company
experience claims in excess of the policy limits, the Company would be
self-insured for these amounts.
12. BRIDGE DEBT FINANCING:
During 1999, the Company raised approximately $890,000 in Bridge Debt Financing
to fund operations via issuance of promissory notes. The proceeds included
$60,000 from notes issued to two executive officers of the Company. The notes
bear interest at a rate of 14% and are due May 31, 2000. In addition to the
stated interest, incentive payments equal to 10% of the original principal will
be paid in each of the five years beginning June 1, 2000. Additionally, warrants
to purchase 83,000 shares of Common Stock, which vest on May 31, 2000, were
issued with an exercise price of $0.75 per share. The fair value of these
warrants totaled $578,250 and was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 7.25%, vesting over the term of the note, expected volatility
of 75% and no expected dividend yields. The effective annual interest rate for
this financing ranged between 153% and 183%, depending on the timing of issuance
of the notes. The placement agent received a payment of $88,659, as well as
27,666 warrants to purchase Common Stock, which vested immediately, exercisable
at $3.00 per share. The placement agent paid $100 for the warrants received.
Upon issuance of the notes, the warrants issued were recorded at fair value. The
difference between the net proceeds received and the fair value of the warrants
was recorded as bridge loan payable. The recorded value of the bridge loan
payable will be accreted to its face value through interest expense over the
term of the notes. Additionally, the 10% payments commencing after Note maturity
are being accreted over the term of the loan to the present value of these
payments at the Note maturity date.
In March 2000, the Company entered into agreements with all noteholders, with
the exception of the two directors of the Company, to convert their respective
principal balance and accrued interest into Common Stock of the Company if TDI
successfully completes its Initial Public Offering ("IPO"). The number of shares
to be issued upon conversion shall equal the principal and accrued interest on
each note divided by a number that will be equal to 50% of the IPO price, before
underwriters' discounts. The Noteholders will waive the bridge loan incentive
payments upon conversion. If the IPO does not close for any reason, the notes
shall remain outstanding under their original terms. The Company intends to
repay the $60,000 notes plus accrued interest to the two directors upon closing
of the IPO.
F-22
<PAGE>
13. AIMS SIMULATOR AND NOTE:
During 1999, the Company borrowed $1,520,000 (including loan fees of $20,000)
under an arrangement with Aims Community College Foundation, which provides
for total borrowings of up to $2,020,000. The loan bears interest at the prime
lending rate (8.25% as of the date of the borrowing) and is due on December 1,
2000. In connection with this borrowing, the Company entered into an arrangement
to manufacture a simulator to be used in a training center at or near Aims
Community College (an affiliate of the Foundation) in Greeley, Colorado.
Under this arrangement, the parties have also agreed to the following:
- The Company will develop and manufacture a Beech 1900D Full Flight
Simulator, Level C at a total estimated cost greater than the
amount borrowed from Aims. The Company commenced work on this
simulator in September 1999, and as of December 31, 1999, had
incurred approximately 9% of the costs for the simulator.
- The Company intends to sell six fractional ownership shares, each
allowing 1,000 hours per year of training, in the simulator to
unrelated third parties, after receiving FAA approval.
- The Company has also agreed to transfer one fractional ownership
share of the simulator to Aims at no additional charge. Along with
this fractional interest, Aims will not be required to pay their
share of the monthly operating costs to the Company incurred at
the center for the life of the simulator. Any unused hours
relating to the one fractional ownership share will be
marketed by the Company with the revenues split between the
Company and Aims on a 50/50 basis.
- The simulator will be placed in a training center to be located in
a building that will be leased from Aims, or a related party, for
an initial term of ten years (see Note 3). The Company will manage
the training center.
- As collateral for this loan, the Company granted a security
interest to Aims in substantially all of its assets, whether now
owned or acquired in the future. The proceeds received from the
sale of each fractional ownership interest must first be applied
to repay this loan and release that share of the fractional
ownership interest from the security interest held by Aims.
In connection with the above transaction, the fair value of the fractional share
of the simulator transferred to Aims and the present value of the fair value of
the future monthly operating revenues not being charged to Aims has been
estimated and will be recorded as deferred revenue of approximately $1.5 million
(approximately $1.125 million as of December 31, 1999). Revenue will be
recognized as the right to the fractional share granted is transferred to Aims
and over the term of the initial lease of the training center building. The
recorded amount of the loan has been reduced accordingly and is $526,000 at
December 31, 1999. The loan balance will be accreted up to $2,020,000 by the due
date of December 1, 2000, and the accretion will be recorded as interest expense
in the accompanying financial statements.
14. 3-TO-1 REVERSE STOCK SPLIT:
On September 7, 1999 the shareholders approved a 3-to-1 reverse stock split. All
share and per share amounts included in the financial statements and the notes
to financial statements have been adjusted
F-23
<PAGE>
accordingly for all periods presented. To eliminate all fractional shares
resulting from this reverse split, the Company will repurchase 42 shares for
$210 in 2000. This amount has been reflected in accrued liabilities and common
stock in the accompanying balance sheet.
15. SUBSEQUENT EVENTS:
As of January 31, 2000, the Company entered into a strategic alliance
agreement with one of its stock owners, Babcock & Brown LP ("B&B"), who is
active in the United States in the leasing of aircraft. B&B is introducing
the Company to potential purchasers of fractional ownership interests in
simulators or hours for use in simulators manufactured by the Company,
primarily airlines. For these services, B&B is receiving warrants for the
purchase of 150,000 shares at a purchase price of $5.00 per share. These
warrants will be distributed during 2000 on predetermined dates. In addition,
as incentive compensation, B&B will receive additional warrants to purchase
up to 475,000 shares of Common Stock at exercise prices ranging from $5.00 to
$10.00 (or, if lower, the fair market value at the time of a sales contract),
based upon the number of fractional ownership interests or 1,000 hour
increments sold by the Company to parties with which B&B has arranged a
meeting or an introduction for the Company. B&B has a cash out option, which
is exercisable between the fourth and seventh anniversary of the agreement,
for shares issuable under these warrants.
The Company received the first draw under a $2.5 million note payable to an
individual in January 2000, with the proceeds being used to partially finance
the costs of constructing a full flight simulator. The loan bears interest at
12% per annum and is payable on February 1, 2001. This loan includes a
provision for a loan fee of $250,000 due on February 1, 2001 and an
additional $750,000 payable to the lender, commencing February 1, 2001, in 60
equal monthly installments of $12,500. This loan is secured by one of TDI's
simulators and related accounts receivables and other rights. The simulator
to be constructed will be part of the Company's NEXUSim program.
In March 2000, the Company amended the terms of certain stock options granted
during 1999. The total amount of options was decreased by 65,000. Additionally,
the vesting terms were extended to three years from the date of grant.
F-24
<PAGE>
================================================================================
PROSPECTUS DELIVERY OBLIGATIONS
Until ______________, 2000 (25 days after the date of this prospectus),
all dealers effecting transactions in the common stock, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their
unsold allotments or subscriptions.
1,200,000 SHARES
TRAINING DEVICES
INTERNATIONAL, INC.
COMMON STOCK
------------
PROSPECTUS
------------
KASHNER DAVIDSON SECURITIES CORPORATION
------------------------------
------------------------------
------------------------------
_____________, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Colorado Business Corporation Act, we have broad powers to
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Colorado law
provides that a director, officer or any other employee, fiduciary or agent, may
be entitled to indemnification if: (1) the person conducted himself or herself
in good faith; (2) the person reasonably believed, (a) in the case of conduct in
an official capacity with the corporation, that his or her conduct was in the
corporation's best interests, and (b) in all other cases, that his or her
conduct was at least not opposed to the corporation's best interests; and (3) in
the case of any criminal proceeding, the person had no reasonable cause to
believe his or her conduct was unlawful. A corporation may not indemnify a
director in connection with a proceeding by or in the right of the corporation
in which the director was adjudged liable to the corporation or in connection
with any other proceeding charging that the director derived an improper
personal benefit, whether or not involving action in an official capacity, in
which the director was adjudged liable on the basis that he or she derived an
improper personal benefit.
Our Bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
full extent permitted under Colorado law. We have also entered into
indemnification agreements with each of our executive officers and directors.
The terms of these indemnification agreements are described in "Management -
Indemnification and Limitation of Liability."
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling TDI
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses related to the
issuance and distribution of the securities being registered hereby which will
be borne by us:
II-1
<PAGE>
<TABLE>
<CAPTION>
ITEM OF EXPENSE AMOUNT
- --------------- --------
<S> <C>
SEC registration fee.............................................................. $ 7,076
NASD filing fee................................................................... 2,500
Listing application fee........................................................... 7,740
Cost of printing and engraving.................................................... 100,000
Transfer Agent fees............................................................... 1,250
Legal fees and expenses........................................................... 236,509
Accounting fees and expenses...................................................... 159,839
Blue sky fees and expenses........................................................ 10,000
Miscellaneous expenses............................................................ 50,000
----------------
Total expenses of issuance and distribution $574,914
Less amount paid through 4/30/00 (194,755)
----------------
Total expenses to be paid from proceeds $380,159
================
</TABLE>
All fees and expenses listed above are estimated for purposes of this
filing.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1996, we have issued and sold unregistered securities as
follows:
1. We granted stock options to our employees, officers and directors
as shown on the following table:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
GRANTS SHARE
------ -----
<S> <C> <C>
DATE
- ----
September, 1997...................................................... 144,000 $3.00
March, 1998.......................................................... 3,333 $4.50
August, 1998......................................................... 82,000 $4.50
April, 1999 ......................................................... 63,333 $0.15
40,000 $4.50
August, 1999......................................................... 34,500 $6.75
November, 1999....................................................... 19,000 $6.75
II-2
<PAGE>
December, 1999....................................................... 255,000 $5.00
-------
Total................................................................ 641,166
=======
</TABLE>
We have adjusted the number of grants in December, 1999 to reflect an
amendment made in March, 2000. Options for 39,423 shares have been forfeited.
2. On December 5, 1996, we issued to Bruce S. Betschart a Convertible
Promissory Note in the principal amount of $100,000 which, as amended in August,
1999, bears interest at a rate of 10% per annum and matures on January 2, 2001.
The conversion rate is one share of common stock for each $3.75 of principal.
3. On December 10, 1996, we sold an aggregate of 66,667 shares of
common stock to four key employees for a total purchase price of $1,000, or
$.015 per share.
4. In January, 1997, we sold an aggregate of 160,000 shares of common
stock at a cash price of $3.75 per share for a total sum of $600,000 in a
private offering to buyers whom we believed were accredited investors. As a
placement agent fee for this offering, Bathgate McColley Capital Group, LLC
received 33,333 shares of common stock valued at $500 and warrants to purchase
6,000 shares of common stock at an exercise price of $3.75 per share.
5. In May, 1997, we borrowed $114,000 from officers and directors of
TDI. Of this amount, $94,000 was repaid in the same year, without interest. The
remaining $20,000 represents a loan by Leonard Hawkins who was a director and
was given a convertible promissory note which contains the same terms as Mr.
Betschart's note described in Item 2 above.
6. On July 30, 1997, we issued four Secured Convertible Promissory
Notes in the total principal amount of $250,000 which were convertible into
shares of common stock at the price of $3.00 per share. We believed that the
four buyers were accredited investors. These Notes had a maturity date of July
31, 2002.
7. On September 3, 1997, we sold 233,333 shares of common stock at a
cash price of $3.00 per share for a total sum of $700,000 to ProFutures Bridge
Capital Fund, L.P., whom we believed to have been an accredited investor. In
lieu of a cash commission for its services in this transaction, Bathgate
McColley Capital received from us 8,333 shares of common stock with an agreed
value of $25,000.
8. On September 4, 1997, we issued an option to purchase 183,333 shares
of common stock to Robert T. Bruce with an exercise price of $3.00 per share as
set forth in an Option Agreement for Purchase of Common Stock executed in
connection with Mr. Bruce's agreement to serve as Chairman of the Board of
Directors. This
II-3
<PAGE>
option has been forfeited as to 83,333 shares, and currently this option remains
outstanding for the purchase of 100,000 shares.
9. In October 1997, the holders of the four Secured Convertible
Promissory Notes in the total principal amount of $250,000 converted these notes
into 85,197 shares of common stock at a price of $3.00 per share.
10. In October, 1997, all of our outstanding shares of "Series A
Preferred Stock," consisting of 3,333 shares, were converted into 66,667 shares
of common stock.
11. In October 1997, we sold 238,333 shares of common stock and issued
warrants to purchase up to 119,167 shares of common stock at a price of $12.00
per unit (each unit consisted of two shares of common stock and one warrant to
purchase one share of stock) for a total sum of $1,430,000. The buyers were
persons or entities whom we believed were accredited investors. For acting as a
placement agent in this offering, Bathgate McColley received warrants to
purchase 11,417 shares of common stock at an exercise price of $6.00 per share.
12. In January, 1998, we issued 10,000 shares of common stock to an
accountant in lieu of paying $18,375 for services performed by him.
13. In May 1999, we issued warrants to purchase 1,000 shares of common
stock to a consultant in partial payment of his fees for financial services at
an exercise price of $.75 per share.
14. From May to August, 1999, we sold warrants to purchase up to 83,000
shares of our common stock at an exercise price per share of $0.75 and issued
notes in the total principal amount of $830,000 bearing interest at a rate of
14% per annum, with a maturity date of (a) May 31, 2000 which can be extended by
us or, if earlier, (b) completion of a $5,000,000 financing by us. We believed
that the purchasers in this offering were accredited investors.
15. In July, 1999, we agreed to issue warrants to purchase 500 shares
of common stock to an attorney in partial payment of his fees for legal services
at an exercise price of $0.75 per share.
16. In August 1999, we issued for $60,000 promissory notes in the
aggregate principal amount of $60,000 bearing interest at the rate of 14% per
annum and warrants to purchase 6,000 shares of common stock to two executive
officers and directors of the Company at an exercise price of $0.75 per share.
II-4
\<PAGE>
17. In August, 1999, we issued to a financial consultant a warrant to
purchase 500 shares at an exercise price of $6.75 per share in partial payment
for his services.
18. From February, 2000 to April, 2000, we have and will issue to
Babcock & Brown, LP warrants to purchase a total of 150,000 shares of our common
stock, at an exercise price of $5.00 per share. We believe that Babcock & Brown,
LP is an accredited investor.
19. In February and March, 2000, we entered into agreements with the
holders of the notes described in Item 14 above for the conversion of those
notes into our common stock at a conversion price equal to one-half the initial
public offering price in this offering. A conversion is to occur on the
effective date of this registration statement.
We relied on an exemption from securities registration pursuant to Rule
701 under the Securities Act for the offer and sale of securities described in
Items 1 and 8 above. The securities were offered and sold either pursuant to
written compensatory benefit plans or pursuant to a written contract relating to
compensation, as provided by Rule 701. In addition, the grant of options as
described in Item 1 may not have constituted a sale under the Securities Act,
and we relied upon exemptions from securities registration pursuant to Section
4(2) of, and Rule 506 under, the Securities Act for the offer and sale to Mr.
Bruce as described in Item 8. Mr. Bruce became a high level officer and director
of TDI at the time of the transaction and had access to information about TDI.
For the offer and sale of securities described in Items 2 and 3, we
relied upon an exemption from securities registration pursuant to Section 4(2)
of the Securities Act. The sales were made to high level officers and directors
of TDI who had access to information about TDI.
For the offer and sale of securities described in Items 4 through 7, 9
and 11 through 19, we relied upon exemptions from securities registration
pursuant to Section 4(2) of, and Rule 506 under, the Securities Act of 1933. In
addition, we relied upon the exemption under Section 3(a)(9) of the Securities
Act for the conversion of securities described in Items 9, 10 and 19 above.
Because of their specific purposes and limited dollar amount, we also relied
upon an exemption from securities registration pursuant to Rule 504 of the
Securities Act for the offer and sale of securities described in Items 12, 13,
15 and 17.
Further, the transactions described in Items 2 through 7 and 11 through
19 may also be considered exempt from securities registration pursuant to Rule
505 of the Securities Act. The total amount offered and sold is less than
$5,000,000 and has been sold primarily to accredited investors.
II-5
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
1 Underwriting Agreement.
2 Amended and Restated Articles of Incorporation of Training
Devices International, Inc.**
3 Amended and Restated Bylaws of Training Devices
International, Inc.**
4.1 Specimen stock certificate representing shares of common stock
of Training Devices International, Inc.*
4.2 Warrant for the purchase of common stock to be issued to the
representative upon the closing of this offering.
4.3 Advisory and Investment Bank Agreement.
5 Opinion of Holland & Hart LLP regarding the legality of the
securities being registered.*
10.1 1997 Incentive and Nonstatutory Stock Option Plan, as
amended.**
10.2 1999 Stock Option Plan.**
10.3 Form of Promissory Note issued to investors from May to
August, 1999.**
10.4 Form of Warrant for the purchase of common stock issued from
May to August, 1999.**
10.5 Placement Agent Agreement dated May 25, 1999.**
10.6 Form of Warrant Agreement between Training Devices
International, Inc. and Bathgate McColley Capital Group, LLC
issued in August, 1999.**
10.7 Form of Warrant for purchase of common stock issued to
investors from October 1997 to January 1998.**
10.8 Form of Warrant Certificate between Training Devices
International, Inc. and principals of Bathgate McColley Capital
Group, LLC issued December 31, 1997.**
10.9 Form of Registration Rights Agreement executed from October,
1997 to January 1998.**
II-6
<PAGE>
10.10 Placement Agent Agreement dated October 8, 1997.**
10.11 Form of Registration Rights Agreement dated July 30, 1997.**
10.12 Placement Agent Agreement dated January 7, 1997.**
10.13 Form of Warrant Certificate between Training Devices
International, Inc. and principals of Bathgate McColley Capital
Group, LLC issued February 20, 1997.**
10.14 Convertible Promissory Note in the principal amount of
$100,000 payable to Bruce Betschart, as amended.**
10.16 Lease Agreement, as amended, dated December 1, 1997,
between Spiral, Inc., as landlord, and Training Devices
International, Inc., as tenant, for premises located at 7367 South
Revere Parkway, Building 2-C, Englewood, Colorado.**
10.17 Promissory Note between Training Devices International, Inc.
and Key Bank National Association dated June 4, 1999.**
10.18 Commercial Pledge Agreement between Training Devices
International, Inc. and Key Bank National Association dated
June 4, 1999.**
10.19 Training Center and Fractional Ownership Agreement dated
September 14, 1999, between TDI and Aims Continuing
Education Authority, with Lease Agreement dated September
14, 1999, between TDI and Aims Continuing Education
Authority, attached as Exhibit A.**
10.20 The following loan documents dated September 14, 1999,
between TDI and Aims Community College Foundation:
(A) Promissory Note; (B) Security Agreement; (C) Line of
Credit Agreement.** (D) Amendment No. 1 to that Security
Agreement between TDI and Aims Community College
Foundation dated September 22, 1999.
10.21 Form of Indemnification Agreement between Training Devices
International, Inc. and its officers and directors.**
10.22 Form of Agreement to Convert Note dated March, 2000
between TDI and holders of promissory notes which are shown
as Exhibit 10.3.
10.23 Strategic Alliance Agreement dated January 31, 2000 between
II-7
<PAGE>
TDI and Babcock & Brown, LP, together with a form of
warrant being issued to Babcock & Brown, LP.
10.24 Promissory Note and Security Agreement dated December 23,
1999, between TDI and Reginald D. Fowler in principal amount
of $2,500,000.
10.25 Final Contract dated November 17, 1999 between Training Devices
International, Inc. and Hydraudyne Systems & Engineering B.V.
concerning motion systems.
10.26 Special Terms Agreement for One Visual System dated __________
between Evans & Sutherland Computer Corporation and Training
Devices International, Inc. concerning visual systems.*
23.1 Consent of Holland & Hart LLP (included in Exhibit 5).*
23.2 Consent of Arthur Andersen LLP.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
*to be filed by amendment
**previously filed
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The small business issuer will provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned small business issuer hereby undertakes to:
II-8
<PAGE>
(1) For determining any liability under the Securities 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 small business issuer pursuant
to Rule 424(b)(1) or (4), or 497(h) under the Securities Act as part
of this Registration Statement as of the time the Commission
declared effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as
a new registration statement for the securities offered in the
Registration Statement, and that offering of such securities at that
time as the initial bona fide offering of those securities.
II-9
<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
of the requirements of the filing on Form SB-2 and authorized this Amendment No.
1 to the registration statement to be signed on its behalf by the undersigned in
the City of Denver, State of Colorado, on March 22, 2000.
TRAINING DEVICES
INTERNATIONAL, INC.
By: /s/ Ronald C. Ellington
----------------------------------
Ronald C. Ellington
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ronald C. Ellington
- -------------------------------- Chairman of the Board and Chief March 22, 2000
Ronald C. Ellington Executive Officer (Principal
Executive Officer)
/s/ Dennis J. Meyer
- -------------------------------- Vice President and Chief Financial March 22, 2000
Dennis J. Meyer Officer (Principal Financial Officer
and Principal Accounting Officer)
/s/ Bruce S. Betschart*
- -------------------------------- Director, President and Chief March 22, 2000
Bruce S. Betschart Operating Officer
/s/ Ann Torre Grant*
- -------------------------------- Director March 22, 2000
Ann Torre Grant
/s/ John Jenkins*
- -------------------------------- Director March 22, 2000
John Jenkins
/s/ Peter Roy*
- -------------------------------- Director March 22, 2000
Peter Roy
</TABLE>
*By: /s/ Ronald C. Ellington
----------------------------
Ronald C. Ellington
Attorney-in-Fact
II-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ----------------------
<S> <C>
1 Underwriting Agreement.
2 Amended and Restated Articles of Incorporation of Training Devices
International, Inc.**
3 Amended and Restated Bylaws of Training Devices International, Inc.**
4.1 Specimen stock certificate representing shares of common stock of
Training Devices International, Inc.*
4.2 Warrant for the purchase of common stock to be issued to the
representative upon the closing of this offering.
4.3 Advisory and Investment Bank Agreement.
5 Opinion of Holland & Hart LLP regarding the legality of the securities
being registered.*
10.1 1997 Incentive and Nonstatutory Stock Option Plan, as amended.**
10.2 1999 Stock Option Plan.**
10.3 Form of Promissory Note issued to investors from May to August, 1999.**
10.4 Form of Warrant for the purchase of common stock issued from May to August, 1999.**
10.5 Placement Agent Agreement dated May 25, 1999.**
10.6 Form of Warrant Agreement between Training Devices International, Inc.
and principals of Bathgate McColley Capital Group, LLC issued in August, 1999.**
10.7 Form of Warrant for purchase of common stock issued to investors from
October 1997 to January 1998.**
10.8 Form of Warrant Certificate between Training Devices International, Inc.
and principals of Bathgate McColley Capital Group, LLC issued
December 31, 1997.**
10.9 Form of Registration Rights Agreement executed from October, 1997 to
January 1998.**
10.10 Placement Agent Agreement dated October 8, 1997.**
10.11 Form of Registration Rights Agreement dated July 30, 1997.**
10.12 Placement Agent Agreement dated January 7, 1997.**
10.13 Form of Warrant Certificate between Training Devices International, Inc.
and principals of Bathgate McColley Capital Group, LLC issued
February 20, 1997.**
II-11
<PAGE>
10.14 Convertible Promissory Note in the principal amount of $100,000 payable
to Bruce Betschart, as amended.**
10.16 Lease Agreement, as amended, dated December 1, 1997, between Spiral,
Inc., as landlord, and Training Devices International, Inc., as tenant, for
premises located at 7367 South Revere Parkway, Building 2-C,
Englewood, Colorado.**
10.17 Promissory Note between Training Devices International, Inc. and Key
Bank National Association dated June 4, 1999.**
10.18 Commercial Pledge Agreement between Training Devices International,
Inc. and Key Bank National Association dated June 4, 1999.**
10.19 Training Center and Fractional Ownership Agreement dated September 14,
1999, between TDI and Aims Continuing Education Authority, with Lease
Agreement dated September 14, 1999, between TDI and Aims Continuing
Education Authority, attached as Exhibit A.**
10.20 The following loan documents dated September 14, 1999, between TDI
and Aims Community College Foundation: (A) Promissory Note;
(B) Security Agreement; (C) Line of Credit Agreement.**
(D) Amendment No. 1 to that Security Agreement between TDI and Aims
Community College Foundation dated September 22, 1999.
10.21 Form of Indemnification Agreement between Training Devices
International, Inc. and its officers and directors.**
10.22 Form of Agreement to Convert Note dated March, 2000 between TDI and
holders of promissory notes which are shown as Exhibit 10.3.
10.23 Strategic Alliance Agreement dated January 31, 2000 between TDI and
Babcock & Brown, LP, together with a form of warrant being issued to
Babcock & Brown, LP.
10.24 Promissory Note and Security Agreement dated December 23, 1999,
between TDI and Reginald D. Fowler in principal amount of $2,500,000.
10.25 Final Contract dated November 17, 1999 between Training Devices
International, Inc. and Hydraudyne Systems & Engineering B.V.
concerning motion systems.
10.26 Special Terms Agreement for One Visual System dated __________
between Evans & Sutherland Computer Corporation and Training
Devices International, Inc. concerning visual systems.*
23.1 Consent of Holland & Hart LLP (included in Exhibit 5).*
23.2 Consent of Arthur Andersen LLP.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
*to be filed by amendment
**previously filed
II-12
<PAGE>
1,200,000 SHARES
TRAINING DEVICES INTERNATIONAL, INC.
(a Colorado corporation)
(No Par Value)
UNDERWRITING AGREEMENT
_______________ - , 2000
KASHNER DAVIDSON SECURITIES CORPORATION
77 South Palm Avenue
Sarasota, Florida 34236
Ladies/Gentlemen:
Training Devices International, Inc., a Colorado corporation (the
"Company"), hereby confirms its agreement withKashner Davidson Securities
Corporation ("Kashner") as representative of the several underwriters named in
Schedule A hereto (collectively, the "Underwriters") as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
approximately 1,200,000 shares (the "Firm Shares") of its authorized and
unissued common stock, no par value (the "Common Stock"), to the Underwriters
upon the terms and subject to the conditions set forth herein. The Company also
proposes to grant to the Underwriters an option to purchase, for the sole
purpose of covering over-allotments in connection with the sale of Firm Shares,
an aggregate of up to 180,000 additional shares ("Option Shares") of Common
Stock upon the terms and subject to the conditions set forth herein and as
provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall
include the Firm Shares and the Option Shares. All shares of Common Stock of the
Company, including the Shares, are hereinafter referred to as "Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company
represents and warrants to and agrees with the Underwriters, as follows:
(a) A registration statement on Form SB-2 (File No. 333-85479) (the
"Registration Statement") with respect to the Shares, including a prospectus
subject to completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
and the applicable rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Securities Act,
and has been filed with the Commission. Any amendments to such registration
statement and any amended prospectuses subject to completion, as may have been
required prior to the date hereof, have been similarly prepared and filed with
the Commission. The Company will file any additional amendments to the
Registration Statement and any amended prospectuses subject to completion, as
may hereafter be required. The Company meets the requirements for use of a
registration statement on Form SB-2. Copies of the Registration Statement and
any amendments and copies of each related prospectus subject to completion have
been delivered to you.
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If the Registration Statement has been declared effective under the
Securities Act by the Commission, the Company will prepare and promptly file
with the Commission the information omitted from the Registration Statement
pursuant to Rule 430A(a) of the Rules and Regulations or as part of a
post-effective amendment to the Registration Statement (including a final form
of prospectus). If the Registration Statement has not been declared effective
under the Securities Act by the Commission, the Company will prepare and
promptly file a further amendment to the Registration Statement, including a
final form of prospectus. The term "Registration Statement" as used in this
Agreement shall mean such Registration Statement, including financial
statements, schedules and exhibits, in the form in which it became or becomes,
as the case may be, effective (including, if the Company omitted information
from the Registration Statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the Registration Statement
at the time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations) and, in the event of any amendment thereto after the effective date
of such Registration Statement, shall also mean (from and after the
effectiveness of such amendment) such Registration Statement as so amended. The
term "Prospectus" as used in this Agreement shall mean the prospectus relating
to the Shares as included in the Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations), except that if
any revised prospectus shall be provided to the Underwriters by the Company for
use in connection with the offering of the Shares that differs from the
Prospectus on file with the Commission at the time the Registration Statement
became or becomes, as the case may be, effective (whether or not such revised
prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations), the term "Prospectus" shall refer to
such revised prospectus from and after the time it is first provided to the
Underwriters for such use.
(b) The Commission has not issued any order preventing or suspending the
use of any preliminary prospectus or instituted proceedings for that purpose,
and each such preliminary prospectus has conformed in all material respects to
the requirements of the Securities Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date (hereinafter defined)
and on any later date on which Option Shares are to be purchased, (i) the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Securities Act and the Rules and Regulations, and will
in all material respects conform to the requirements of the Securities Act and
the Rules and Regulations, and (ii) neither the Registration Statement nor the
Prospectus, nor any amendments or supplements thereto, will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties contained in this subparagraph
shall apply to information contained in or omitted from the Registration
Statement or the Prospectus or any such amendment or supplement in reliance
upon, and in conformity with, written information furnished to the Company by
any Underwriter specifically for inclusion or exclusion therein or therefrom.
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(c) Each contract, agreement, instrument, lease, license or other item
required to be described in the Registration Statement or the Prospectuses or
filed as an exhibit to the Registration Statement has been so described or
filed, as the case may be.
(d) The Company and each of its Subsidiaries (as such term is defined in
Rule 405 under the Securities Act) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its organization, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement; each of the Company and its Subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the ownership or leasing of its properties or the
conduct of its business requires such qualification except where the failure to
be so qualified or to be in good standing would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its Subsidiaries considered as a whole;
each of the Company and its Subsidiaries is in possession of and operating in
compliance with all authorizations, licenses, certificates, consents, orders and
permits from state, Federal and other regulatory authorities which are material
to the conduct of its business, all of which are valid and in full force and
effect; neither the Company nor its Subsidiaries is in violation of its charter
or bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material
indenture, mortgage, deed of trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, or any material lease, contract,
joint venture, or other agreement or instrument to which it is a party or by
which its property is bound or in violation of any law, order, rule, regulation,
writ, injunction, judgment or decree of any government, governmental agency or
body or court, domestic or foreign, of which it has knowledge except such
failures to comply as would not, individually or in the aggregate, have a
material adverse effect on the Company and its Subsidiaries considered as a
whole.
(e) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This Agreement
and the Warrant Agreement (the "Warrant Agreement") by and between the Company
and the Managing Underwriter have been duly authorized, executed and delivered
by the Company and are valid and binding agreements on the part of the Company,
enforceable in accordance with their respective terms, except as rights to
indemnification and contribution hereunder may be limited by applicable law and
except as the enforcement hereof may be limited by applicable bankruptcy,
insolvency, reorganization moratorium or other similar laws relating to or
affecting creditors' rights generally, or by general equitable principles; the
performance of this Agreement and the Warrant Agreement and the consummation of
the transactions herein and therein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any material indenture, mortgage, deed of trust, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, or any material
lease, contract, joint venture or other agreement or instrument to which the
Company is a party or by which the property of the Company is bound including
any licenses from third parties, or (ii) the Articles of Incorporation and
Bylaws of the Company, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any government or governmental agency or body
or court, domestic or foreign, having jurisdiction over the Company or over the
properties of the Company, except for breaches, violations or defaults that
individually or in the aggregate, would not have a material adverse effect on
the Company; and no consent, approval, authorization or order of any court or
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governmental agency or body is required for the consummation of the transactions
herein contemplated, except such as may be required under the Securities Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or under
state or other securities or Blue Sky laws, all of which requirements have been
satisfied in all material respects.
(f) Except as disclosed in the Registration Statement or the Prospectus,
there is no action, suit or proceeding before or by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of the
Company, threatened, against or affecting the Company or its Subsidiaries which
(i) is required to be disclosed in the Registration Statement or the Prospectus
or which might result in any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise, or which might
materially and adversely affect the properties or assets thereof; or (ii) which
might be expected to materially and adversely affect the consummation of the
transactions contemplated by this Agreement; all pending legal or governmental
proceedings to which the Company or its Subsidiaries is a party or of which any
of their respective properties or assets is the subject which are not described
in the Registration Statement, including ordinary routine litigation incidental
to the Company's business, could not reasonably be expected to result in a
material adverse change in the condition, financial or otherwise, or the
earnings, business affairs or business properties of the Company and its
Subsidiaries considered as one enterprise; and there are no contracts or
documents of the Company or its Subsidiaries which are required to be described
in the Registration Statement or the Prospectus, or to be filed as exhibits
thereto, by the Securities Act or by the Rules and Regulations which have not
been accurately described in all material respects and filed as exhibits to the
Registration Statement. To the best of the Company's knowledge, the contracts so
described in the Prospectus are in full force and effect on the date hereof, and
neither the Company nor its Subsidiaries is in breach of or default under, and
to the Company's knowledge, no other party is in material breach of or material
default under, any of such contracts, except for any liabilities specifically
described in the Registration Statement.
(g) All outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, have been
issued in compliance with all Federal and state securities laws, were not issued
in violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities (other than such preemptive rights or other rights to
subscribe for or purchase securities as were fully complied with or expressly
waived or with respect to the violation of which the right to make claim is
barred by the applicable statute of limitations), and the authorized and
outstanding capital stock of the Company conforms in all material respects to
the statements relating thereto contained in the Registration Statement and the
Prospectus (and such statements correctly state the substance of the instruments
defining the capitalization of the Company); the Firm Shares and the Option
Shares to be purchased from the Company hereunder have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid and
nonassessable; the 120,000 shares of Common Stock issuable under the warrant
(the "Managing Underwriter's Warrants") to be granted to the Managing
Underwriter under the Warrant Agreement have been duly authorized for issuance
and sale to the Managing Underwriter pursuant to this Agreement and, when issued
and delivered by the Company against payment therefor in accordance with the
terms of the Warrant Agreement, will be duly and validly issued and fully paid
and nonassessable; and no preemptive right,
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co-sale right, registration right, right of first refusal or other similar right
of stockholders exists with respect to any of the Firm Shares, Option Shares or
shares of Common Stock issuable under the Managing Underwriter's Warrant or the
issuance and sale thereof other than those that have been expressly waived prior
to the date hereof and those that will automatically expire upon the
consummation of the transactions contemplated on the Closing Date. No further
approval or authorization of any stockholder, the Board of Directors or others
is required for the issuance and sale or transfer of the Shares except as may be
required under the Securities Act, the Exchange Act or under state or other
securities or Blue Sky laws. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company (including the notes
thereto) included in the Prospectus, the Company has no outstanding options to
purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the options
or other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights. The shares of Common Stock
reserved for issuance upon exercise of the Company's outstanding options and
warrants have been duly and validly authorized and are sufficient in number to
meet the exercise requirements of such options.
(h) Arthur Andersen LLP, which has examined the financial statements
(together with related schedules and notes) of the Company filed with the
Commission as a part of the Registration Statement and which are included in the
Prospectus, are independent accountants within the meaning of the Securities Act
and the Rules and Regulations; the audited and pro forma financial statements of
the Company, together with the related schedules and notes, and the unaudited
financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the respective dates and for the respective periods to which
they apply; and all audited and pro forma financial statements, together with
the related schedules and notes, and the unaudited and pro forma financial
information, filed with the Commission as part of the Registration Statement,
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be otherwise
stated therein. The selected and summary financial and statistical data included
in the Registration Statement present fairly the information shown therein and
have been compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to be
included in the Registration Statement.
(i) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise stated therein,
(i) there has been no material adverse change in the business, properties,
operations, condition (financial or otherwise) or in the earnings, business
affairs or business prospects of the Company and its Subsidiaries, whether or
not arising in the ordinary course of business, (ii) there have been no
transactions entered into by the Company other than those in the ordinary course
of business, which are material with respect to the Company, (iii) there has
been no obligation that is material to the Company, direct or contingent,
incurred by the Company or any Subsidiary, except obligations incurred in the
ordinary course of business, (iv) there has been no change in the capital stock
of the Company, (v) there has been no change in the outstanding indebtedness of
the Company which is material to the Company, (vi) there has been no dividend or
distribution of any kind declared, paid or
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made by the Company on behalf of any class of its respective capital stock,
(vii) there has been no redemption, purchase or acquisition or agreement to
redeem, purchase or acquire shares of Common Stock of the Company, (viii) to the
knowledge of the Company, there has been no change in any Federal, state, or
other laws, rules, or regulations (or interpretations thereof) applicable to the
business of the Company that would have a material adverse effect on the
Company, and, to the knowledge of the Company, no such change is proposed other
than as described in the Prospectus.
(j) Except as described in the Prospectus, (i) the Company and its
Subsidiaries have good and marketable title to all properties and assets
described in the Prospectus as owned by them, free and clear of all liens,
charges, encumbrances or restrictions of any kind, except those described in the
Prospectus, or those not material, singly or in the aggregate, to the business
of the Company and its Subsidiaries considered as a whole, (ii) the agreements
to which the Company is a party described in the Prospectus are valid
agreements, enforceable by the Company, except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally or by general equitable
principles, and (iii) the Company has valid and enforceable leases for the
properties described in the Prospectus as leased by it except as enforcement may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(k) All Federal, state, local and foreign tax returns required to be filed
by the Company or its Subsidiaries in any jurisdiction have been filed, and all
material taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to be due from such entities
have been paid other than those being contested in good faith and for which
adequate reserves have been provided or those currently payable without penalty
or interest; and adequate charges, accruals and reserves have been provided for
in the financial statements referred to in Section 2(g) above in respect of all
Federal, state, local and foreign taxes for all periods as to which the tax
liability of the Company or its Subsidiaries has not been finally determined or
remains open to examination by applicable taxing authorities.
(l) No labor dispute with the employees of the Company or its Subsidiaries
exists or, to the knowledge of the Company, is imminent; and the Company is not
aware of any existing or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers, contractors or customers which might be
expected to result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise. No collective
bargaining agreement exists with any of the Company's employees and, to the
Company's knowledge, no such agreement is imminent.
(m) The Company and its Subsidiaries own or possess, or can acquire on
reasonable terms, the patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names presently employed by them in connection with the
business now operated by them and neither the Company nor its Subsidiaries has
received any notice or is otherwise aware of any infringement of or conflict
with asserted rights of others with respect to any patent or proprietary rights
or of any facts or circumstances which would render
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any patent and proprietary rights invalid or inadequate to protect the interest
of the Company or its Subsidiaries therein, and which infringement or conflict
(if the subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy singly or in the aggregate, would result in any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its Subsidiaries considered as
one enterprise.
(n) Except as set forth in the Prospectus, the Company and its Subsidiaries
are in compliance in all material respects with all applicable laws, statutes,
ordinances, rules or regulations, the enforcement of which, individually or in
the aggregate, would be reasonably expected to have a material adverse effect on
the condition, financial or otherwise, or the earnings, business affairs or
business prospects of the Company and its Subsidiaries considered as one
enterprise.
(o) The Common Stock has been approved for quotation on the Nasdaq SmallCap
Market and the Boston Stock Exchange, subject to official notice of issuance.
(p) The Company has been advised concerning the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and
has in the past conducted, and intends in the future to conduct, its affairs in
such a manner as to ensure that it will not become an "investment company"
within the meaning of the 1940 Act and such rules and regulations.
(q) The Company has not distributed and will not distribute prior to the
Closing Date or on any date on which Option Shares are to be purchased, as the
case may be, any offering material in connection with the offering and sale of
the Shares other than the Prospectus, the Registration Statement and other
materials permitted by the Securities Act.
(r) The Company has not at any time during the last five years (i) made any
unlawful contribution to any candidate for foreign office, or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
Federal or state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof.
(s) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares. The Company has not effected any sales of
securities required to be disclosed in Item 26 of Form SB-2 under the Securities
Act, other than as disclosed in the Registration Statement.
(t) Except as may be waived by Kashner, each officer and director of the
Company and each beneficial owner of at least 5% of the outstanding shares of
Common Stock and options and warrants to purchase Common Stock outstanding prior
to the effective date of the Registration Statement have agreed in writing that
such persons will not offer to sell, contract to sell, sell short, or otherwise
sell or dispose of any shares of Common Stock of the Company, any options or
warrants to purchase any shares of Common Stock of the Company, or any
securities convertible into or exchangeable for shares of the Common Stock owned
directly by such person or with respect to which such person has the power of
disposition otherwise than (i) as a gift or gifts, provided the donee or donees
thereof agree to be bound by this restriction or (ii) with the prior written
consent of Kashner, for a period expiring two years after the effective date of
the Registration Statement.
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(u) Except as described in the Registration Statement, (i) neither the
Company nor its Subsidiaries is in violation of any Federal, state, local or
foreign laws or regulations relating to pollution or protection of human health,
the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened release
of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Environmental
Materials") or to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Environmental Materials
(collectively, the "Environmental Laws"), except such violations as would not,
singly or in the aggregate, have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or business prospects
of the Company and its Subsidiaries considered as one enterprise, and (ii) to
the Company's knowledge, there are no events or circumstances that could form
the basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against or
affecting the Company or its Subsidiaries relating to any Environmental
Materials or the violation of any Environmental Laws, which, singly or in the
aggregate, could reasonably be expected to have a material adverse effect on the
condition, financial or otherwise, or the earnings, business affairs or business
prospects of the Company and its Subsidiaries considered as one enterprise.
(v) The Company and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles as in effect in the United States and to maintain asset
accountability; (iii) access to bank accounts is permitted only in accordance
with management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(w) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus. Neither
the Company nor any employee or agent of the Company has made any payment or
transfer of any funds or assets of the Company or conferred any personal benefit
by use of the Company's assets, or received any funds, assets or personal
benefit in violation of any law, rule or regulation.
(x) On the Closing Date and upon delivery of the Option Shares, as
applicable, all transfer and other taxes (other than income taxes) that are
required to be paid in connection with the sale and transfer of the Shares to
the Underwriters will have been paid.
(y) The Company does not currently have and has never had any pension plan
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability, the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended,
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including the regulations and published interpretations thereunder (the "Code");
and each "pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by failure to
act, which would cause the loss of such qualification.
(z) The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws
of Florida) AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA (the "Cuba
Act"), and the Company further agrees that if it commences engaging in business
with the government of Cuba or with any person or affiliate located in Cuba
after the date the Registration Statement becomes or has become effective with
the Commission or the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's
business in Cuba or with any person or affiliate located in Cuba changes in any
material way, the Company will provide the Department notice of such business or
change, as appropriate, in a form acceptable to the Department.
(aa) Any certificate signed by any officer of the Company and delivered to
the Underwriters or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
(bb) Except as may be set forth in the Prospectus, the Company has not
incurred any liability for a fee, commission, or other compensation on account
of the employment of a broker or finder in connection with the transactions
contemplated by the Underwriting Agreement.
(cc) The Company and each subsidiary is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which the Company and the
subsidiaries are engaged.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company agrees to sell to each Underwriter,
severally and not jointly, and each Underwriter, severally and not jointly,
agrees to purchase from the Company, respectively, at a purchase price of
[$7.00] per Share less an underwriting discount of 10.0%, the number of Shares
set forth in SCHEDULE A hereto (subject to adjustment as provided in Section
10).
Delivery of definitive certificates for the Firm Shares to be purchased by
the Underwriters pursuant to this Section 3 shall be made against payment of the
purchase price therefor by the Underwriters by certified or official bank check
in next day funds, payable to the order of the Company at the offices of
[Kashner Davidson Securities Corporation, 77 South Palm Avenue, Sarasota,
Florida 34236], or at such other place as shall be agreed upon by the
Underwriters and the Company, at 9:30 a.m. on the fourth business day following
the first day that Shares are traded (or at such time and date to which payments
and delivery shall have been postponed pursuant to Section 10 hereof), such time
and date of payment and delivery being herein called the "Closing Date." The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or at such other location as you may reasonably request for
checking at least one business day prior to the Closing Date and will be in such
names and denominations as you may request, such request to be made at least two
business days prior to the Closing Date. If the Underwriters so elect, delivery
of
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the Shares may be made by credit through full fast transfer to the accounts at
Depository Trust Company designated by the Underwriters.
It is understood that Kashner, individually and not as representative of
the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by Kashner prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by Kashner shall not relieve any such Underwriter or Underwriters of any
of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to offer the Firm Shares to the public as set forth in the
Prospectus.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters) and under
"Underwriting" in any Preliminary Prospectus and in the final form of Prospectus
filed pursuant to Rule 424(b) constitutes the only information furnished by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the
Underwriters, represent and warrant to the Company that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make such
statements, in the light of the circumstances in which they were made, not
misleading.
4. FURTHER COVENANTS OF THE COMPANY. The Company covenants with the several
Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify Kashner, promptly after it
shall receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to Kashner that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to Kashner that the Prospectus contains such information
and has been filed with the Commission within the time period prescribed; it
will notify Kashner promptly of any request by the Commission for the amending
or supplementing of the Registration Statement or Prospectus or for additional
information; promptly upon request of Kashner, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters, may be
necessary or advisable in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify Kashner of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or
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omissions, if, at any time when a prospectus relating to the Shares is required
to be delivered under the Securities Act, any event shall have occurred as a
result of which the Prospectus or any other prospectus relating to the Shares as
then in effect would include any untrue statement of a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Securities Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to Kashner a reasonable time prior to the proposed filing thereof or
to which Kashner shall reasonably object in writing, subject, however, to
compliance with the Securities Act, the Rules and Regulations thereunder and the
provisions of this Agreement.
(b) The Company will advise Kashner, promptly after it shall receive notice
or obtain knowledge thereof of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will cooperate with the Underwriters and Underwriters'
counsel in connection with their efforts to qualify the Shares for offering and
sale under the securities laws of such jurisdictions as Kashner may designate as
to continue such qualifications in effect for so long as may be required for
purposes of the distribution of the Shares, except that the Company shall not be
required in connection therewith or as a condition thereof to qualify as a
foreign corporation or to execute a general consent to service of process in any
jurisdiction or to make any undertaking with respect to the conduct of its
business. In each jurisdiction in which the Shares shall have been qualified as
above provided, the Company will make and file such statements and reports in
each year as are or may be reasonably required by the laws of such jurisdiction.
(d) The Company will furnish Kashner, as soon as available, copies of the
Registration Statement (two of which will be signed and include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements to
such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Securities Act, all in such quantities as you may from
time to time reasonably request.
(e) The Company will make generally available to its stockholders as soon
as practicable, but in any event not later than the 45th day following the end
of the fiscal quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earnings statement (which will
be in reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Securities Act and covering a twelve-month period
beginning after the effective date of the Registration Statement.
(f) As long as the Company is a reporting company under the Exchange Act,
the Company will furnish to its stockholders, as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and unaudited quarterly
reports of operations for each of the first three (3) quarters
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of the fiscal year, and for a period of five (5) years after the effective date
of the Registration Statement, the Company will furnish to the several
Underwriters hereunder, upon request (i) concurrently with furnishing such
reports to its stockholders, statements of operations of the Company for each of
the first three (3) quarters in the form furnished to the Company's
stockholders; (ii) concurrently with furnishing to its stockholders, a balance
sheet of the Company as of the end of such fiscal year, together with statements
of operations, of stockholders' equity, and of cash flows of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent accountants; (iii) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission, any
securities exchange or the National Association of Securities Dealers, Inc.
("NASD"); (v) every material press release and every material news item or
article in respect of the Company or its affairs which was released or prepared
by the Company (excluding, in each case customary product-related press releases
and articles); and (vi) any additional information of a public nature concerning
the Company, or its business which you may reasonably request. During such
five-year period, if the Company shall have active subsidiaries, the foregoing
financial statements shall be on a consolidated basis to the extent that the
accounts of the Company and its Subsidiaries are consolidated, and shall be
accompanied by similar financial statements for any significant subsidiary which
is not so consolidated. For a period of five (5) years from the date of the
Registration Statement, the Company will furnish to Kashner and, upon request,
to each of the other Underwriters, as soon as available, a copy of each report
of the Company mailed to holders of the Common Stock or publicly filed with the
Commission or any automated quotation system or national securities exchange on
which any class of securities of the Company is listed.
(g) The Company will apply the net proceeds from the sale of the Shares
being sold by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(h) The Company shall comply with all provisions of all undertakings
contained in the Registration Statement.
(i) If the transactions contemplated hereby are not consummated by reason
of any failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed hereunder or to fulfill any condition of
the Underwriters' obligations hereunder, or if the Company shall terminate this
Agreement under Section 11(a), the Company will, in order to reimburse the
several Underwriters for all expenses (including fees and disbursements of
counsel for the several Underwriters) incurred by the Underwriters in
investigating, preparing to market or marketing the Shares, pay to Managing
Underwriter the sum of $25,000, which amount has already been paid.
(j) If at any time during the 90-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price of the Common Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from Kashner advising the Company to the effect set forth above,
forthwith prepare, consult with Kashner concerning the substance of, and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
Further, pending the offering and for a period of twenty-five (25) days
thereafter (i) the Company
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agrees and undertakes to consult with the Managing Underwriter prior to
distribution to third parties by the Company of any financial information, news
releases, and/or other publicity regarding the Company, its business, or any
terms of the proposed offering; and (ii) the Underwriter will consult with the
Company prior to the issuance of any research report or recommendation
concerning the Company's securities, and (iii) copies of all documents which
Company or its public relations advisors intend to distribute will be provided
to the Managing Underwriter for review prior to such distribution.
(k) On the Closing Date the Company will sell to Kashner, for a total price
of $10.00, the Managing Underwriter's Warrants to purchase one share of Common
Stock of the Company for each ten (10) shares of the Company's Common Stock
which have been sold (or purchased by the Underwriters), as set forth in the
Prospectus. The Managing Underwriter's Warrants shall have the terms and be in
the form filed as an exhibit to the Registration Statement. At any time during
the period commencing twelve (12) months and ending five (5) years after the
effective date of the Offering, the Warrants shall be exercisable at an exercise
price per share equal to 120% of the initial public offering price.
(l) As long as the Company is a reporting company under the Exchange Act,
the Company will comply with the Securities Act, the Exchange Act, the rules and
regulations of the NASD and applicable state securities or Blue Sky laws so as
to permit the continuance of sales and dealings in the Common Stock under the
Securities Act, the Exchange Act, the rules and regulations of the NASD, and
applicable state securities or Blue Sky laws, including the filing with the NASD
and the Commission of all reports required to be filed pursuant to the
applicable provisions of the rules and regulations of the NASD, the Securities
Act, and the Exchange Act, and will deliver to the holders of the Common Stock
all reports required to be provided to such holders pursuant to the applicable
provisions of the rules and regulations of the NASD, the Securities Act, the
Exchange Act, and applicable state securities or Blue Sky.
(m) For a period of two (2) years from the Effective Date of the
Registration Statement the Managing Underwriter shall have a right of first
refusal for any public or private offerings of securities to raise capital by
the Company, or any of its affiliates or any of its present or future
subsidiaries. In the event the Company desires to raise additional capital
through the issuance of any securities using the services of an Underwriter,
investment banker or finder the Company shall first submit the proposed terms of
the offering to Kashner in writing. Kashner shall have ten (10) business days to
accept or reject such offer. The Company shall not enter into an arrangement
with any other party on terms more favorable than those offered to Kashner
without first re-offering them to Kashner.
(n) The Company agrees that it will immediately after the Closing and for a
period of not less than two (2) years thereafter, invite a designee of the
Managing Underwriter (the "Advisor") to attend all meetings at the board of
directors and such Advisor shall receive all notices and other correspondence
and communications sent by the Company to members of its board of directors. The
Company further agrees that, during such two (2) year period, it shall schedule
no less than four (4) formal and "in person" meetings (which may include
telephonic meetings), of its board of directors in each such year which meetings
such Advisor shall be permitted to attend as set forth herein; said meeting
shall be held quarterly each year and advance notice of such meetings shall be
given to the Advisor. The Advisor shall not be entitled to a vote at any such
meetings and shall
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receive no compensation for his services, except reimbursement of travel
expenses. Further, during such two (2) year period, the Company shall give
notice to the Managing Underwriter with respect to any proposed acquisitions,
mergers, reorganizations or other similar transactions. The Company agrees to
indemnify and hold the Underwriters and such Advisor or Director harmless
against any and all claims, actions, damages, costs and expenses, and judgments
arising solely out of the attendance and participation of your designee at any
such meeting described herein. In the event the Company maintains a liability
insurance policy affording coverage for the acts of its officers and directors,
it agrees, if possible, to include the Advisor as an insured under such policy.
(o) The Company agrees that for a period of three (3) years from the
Effective Date of the Registration Statement, the Company will hold an annual
meeting of shareholders for the election of directors within 180 days after the
end of each of the Company's fiscal years and, within 150 days after the end of
the Company's fiscal years provide the Company's shareholders with the audited
financial statements of the Company as of the end of the fiscal year just
completed prior thereto. Such financial statements will be those required by
Rule 14a-3 or 14c under the 1934 Act and shall be included in an annual report
pursuant to the requirement of such Rule.
(p) In the event any officer, director, employee or 5% shareholder of the
Company sells any restricted securities of the Company pursuant to Rule 144 or
after such restricted securities have been registered pursuant to a registration
statement (including a registration statement on Form S-8 or such comparable
form) the Company will use its best efforts to effect such transactions through
the Managing Underwriter. The Company agrees that in the event that it
establishes a 401(k) plan or any other type of investment plan for employees
that it will employ the Managing Underwriter as the agent for such plan, if the
agent can provide the same service at the same cost as the best provider the
Company can provide. The Company agrees that in the event that it chooses to
invest any part of the net profits of the proposed offerings or put any part of
such proceeds on account at an investment bank than such proceeds shall be
deposited or invested by the Managing Underwriter.
(q) on the Closing Date, the Company and the Managing Underwriter will
execute a non-exclusive corporate finance agreement pursuant to which the
Managing Underwriter will perform consulting services to the Company for a
twenty four month period for an aggregate fee of $96,000. The entire fee due to
the Managing Underwriter pursuant to the corporate finance agreement shall be
pre-paid at the Closing Date.
(r) The Company has appointed [American Securities Transfer Incorporated]
as transfer agent for the Common Stock, subject to the Closing. The Company will
not change or terminate such appointment for a period of three years from the
Closing Date without first obtaining the written consent of the Managing
Underwriter. For a period of three years after the effective date of the
Registration statement, the Company shall cause the transfer agent to deliver
promptly to the Managing Underwriter a duplicate copy of the daily transfer
sheets relating to trading of the Securities. The Company shall also provide to
the Managing Underwriter, on a weekly basis, copies of the DTC special
securities positions listing report.
(s) During the period of 180 days after the date of this Agreement, the
Company will not at any time, directly or indirectly, take any action designed
to or that will constitute, or that might reasonably be expected to cause or
result in, the stabilization of the Common stock to facilitate the sale or
resale of any of the Securities.
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(t) The Company will not take any action to facilitate the sale of any
shares of Common Stock pursuant to Rule 144 under the Act if any such sale would
violate any of the terms of the Lock-up Agreements.
(u) The Company will prepare and file a registration statement with the
Commission pursuant to section 12 of the 1934 Act, and will use its best efforts
to have such registration statement declared effective by the Commission on an
accelerated basis on the day after the Effective Date. For this purpose the
Company shall prepare and file with the Commission a general Form of
Registration of Securities (Form 8-A or Form 10).
5. EXPENSES.
(a) The Company agrees with each Underwriter that the Company will pay and
bear all costs and expenses in connection with the preparation, printing and
filing of the Registration Statement (including financial statements, schedules
and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Preliminary Blue Sky
Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and
Power of Attorney and any instruments related to any of the foregoing; the
issuance and delivery of the Shares hereunder to the Underwriters, including
transfer taxes, if any, and the cost of all certificates representing the Shares
and transfer agents' and registrars' fees; the fees and disbursements of counsel
for the Company; all fees and other charges of the Company's independent public
accountants; the cost of furnishing to the Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary Prospectus
and the Prospectus, and any amendments or supplements to any of the foregoing;
and all postage costs incurred in connection with the qualification of the
Shares under the laws of such jurisdictions as you may designate; and all other
expenses directly incurred by the Company in connection with the performance of
its obligations hereunder.
(b) Kashner shall be entitled to receive from the Company, for itself and
not as representative of the Underwriters, a nonaccountable expense allowance
equal to 2.5% of the gross proceeds of the Offering less the $25,000 previously
paid pursuant to the terms of the Engagement Letter.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters to purchase and pay for Shares as provided herein shall be subject
to the accuracy, as of the date hereof and the Closing Date and any later date
on which Option Shares are to be purchased (the "Option Closing Date"), as the
case may be, of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later than
5:30 p.m. on the date hereof, or with the consent of the Underwriters, at a
later time and date, not later, however, than 5:30 p.m. on the first business
day following the date hereof, or at such later time and date as may be approved
by a majority in interest of the Underwriters; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
Securities Act or proceedings therefor initiated or threatened by the Commission
and any request on the part of the Commission for additional information (to be
included in the Registration Statement or the
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Prospectus or otherwise) shall have been complied with to the reasonable
satisfaction of counsel to the Underwriters. If the Company has elected to rely
upon Rule 430A of the Rules and Regulations, the price of the Shares and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Underwriters of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations. Qualification under the securities laws
of such states as you may deem necessary to the success of the underwriting of
the issue and sale of the Shares upon the terms and conditions set forth in this
Agreement or contemplated by this Agreement and containing no provisions
unacceptable to you will have been secured, and no stop order (or the equivalent
thereof) will be in effect denying or suspending effectiveness of such
qualification, nor will any stop order proceedings (or the equivalent thereof)
with respect thereto be instituted or pending or threatened under such laws.
(b) At the Closing Date and the Option Closing Date, if any, counsel for
the Underwriters shall have been furnished with such documents and opinions as
they may require for the purpose of enabling them to pass upon the issuance and
sale of the Shares as contemplated herein and related proceedings or in order to
evidence the accuracy of any of the representations and warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Shares as
herein contemplated shall be satisfactory in form and substance to the
Underwriters and counsel for the Underwriters.
(c) There shall not have been, since the date hereof or since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, any change in the condition (financial or otherwise),
earnings, operations, business affairs or business prospects of the Company and
its Subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business which, in your sole judgment, is material and
adverse and that makes it, in your sole judgment, impracticable or inadvisable
to proceed with the public offering of the Shares as contemplated by the
Prospectus, and the Underwriters shall have received a certificate of the
President or Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of the Closing Date, to the effect
that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 2 hereof are true and correct with the
same force and effect as though expressly made at and as of the Closing Date,
(iii) the Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied at or prior to the Closing Date, and
(iv) no stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been initiated or
threatened by the Commission or any Blue Sky jurisdiction.
(d) At the Closing Date the Underwriters shall have received:
(1) The opinion, dated as of the Closing Date, of Holland & Hart
LLP, counsel for the Company, in form and substance satisfactory to counsel for
the Underwriters, to the effect that:
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(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Colorado.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus and to enter into and perform its
obligations under this Agreement and to issue, sell and deliver to the
Underwriters the Firm Shares or the Option Shares, as the case may be, to be
issued and sold by it hereunder.
(iii) The Company is not qualified to do business as a foreign
corporation in any foreign jurisdictions, and to counsel's knowledge is not
required to be qualified to do business as a foreign corporation in any other
jurisdiction where a failure to be so qualified would have a material adverse
effect on the Company.
(iv) At the Closing Date, after giving effect to the sale of
the Firm Shares, the authorized capital stock of the Company is as set forth in
the Prospectus under the caption "Capitalization" as of the dates stated
therein; the issued and outstanding shares of Common Stock have been duly
authorized and validly issued under Colorado corporate law and are fully paid
and nonassessable and have not been issued in violation of any preemptive right
contained in the Articles of Incorporation or Bylaws of the Company or, to such
counsel's knowledge, any co-sale right, registration right, right of first
refusal or other similar right (other than such preemptive rights or other
rights to subscribe for or purchase securities as were fully complied with or
expressly waived or with respect to the violation of which the right to make a
claim is barred by the applicable statute of limitation).
(v) The Firm Shares and the Option Shares, as the case may be,
to be purchased from the Company hereunder have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement against payment
therefor in accordance with the terms hereof, will be validly issued and fully
paid and nonassessable, and will not be issued in violation of any preemptive
right under the Articles of Incorporation or Bylaws of the Company or, to such
counsel's knowledge, any co-sale right, right of first refusal or other similar
right and the stockholders of the Company have no preemptive right under the
Articles of Incorporation or Bylaws of the Company or, to such counsel's
knowledge, other rights to purchase any of the Shares; the shares of Common
Stock reserved for issuance upon the exercise of the Underwriters' Warrants have
been duly and validly authorized and are presently sufficient in number to meet
the exercise requirements thereof, and such shares of Common Stock, when issued
upon exercise, will be duly and validly issued, fully paid (assuming exercise in
accordance with the Warrant Agreement and receipt by the Company of the exercise
price thereof) and nonassessable; the stockholders of the Company have no
preemptive right under the Articles of Incorporation or Bylaws of the Company
or, to such counsel's knowledge, other rights to purchase any of the Shares; and
the shares of Common Stock reserved for issuance upon the exercise of the
Company's outstanding options have been duly and validly authorized and are
presently sufficient in number to meet the exercise requirements of such
options, and such shares of Common Stock, when issued upon exercise, will be
duly and validly issued, fully paid (assuming exercise in accordance with the
governing instruments therefor and receipt by the Company of the exercise price
thereof) and nonassessable.
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(vi) The issuance of the Shares to be purchased hereunder is
not subject to preemptive or other similar rights arising by operation of law
or, to their knowledge and information, otherwise.
(vii) Each Subsidiary has been duly incorporated and is
validly existing as a corporation and is in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority to
own, lease and operate its properties and to conduct it business as described in
the Registration Statement, and is duly qualified as a foreign corporation to
transact business and is in good standing in the State of Colorado, and, to the
best of its knowledge, any Subsidiary is not required to be qualified to do
business as a foreign corporation in any other jurisdiction; all of the issued
and outstanding capital stock of each such Subsidiary has been duly authorized
and validly issued, is fully paid and nonassessable and, to the best of their
knowledge and information, is owned by the Company directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity.
(viii) This Agreement and the Warrant Agreement have been duly
authorized by all necessary corporate action on the part of the Company and have
been duly executed and delivered by the Company and assuming due authorization,
execution and delivery by the Underwriters, if construed under the laws of
Colorado, are valid and binding agreements of the Company, except insofar as
indemnification and contribution provisions may be limited by applicable law or
equitable principles, and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally or any general equitable principles.
(ix) The Registration Statement has been declared effective
under the Securities Act; any required filing of the Prospectus pursuant to Rule
424(b) has been made in the manner and within the time period required by Rule
424(b) and, to their knowledge and information, no stop order suspending the
effectiveness of the Registration Statement has been issued under the Securities
Act or proceedings therefor have been initiated or are pending or threatened by
the Commission. The Shares have been approved for inclusion on the Nasdaq
SmallCap Market and the Boston Stock Exchange.
(x) The Registration Statement, Prospectus and each amendment
or supplement to the Registration Statement and Prospectus, as of their
respective effective or issue dates (other than the financial statements and
supporting schedules included therein, as to which no opinion need be rendered)
complied as to form in all material respects with the requirements of the
Securities Act and the applicable Rules and Regulations.
(xi) The terms and provisions of the capital stock of the
Company conform in all material respects to the description thereof contained in
the Prospectus under the caption "Description of Securities."
(xii) The information in the Prospectus under the caption
"Description of Securities" to the extent that they constitute matters of law or
legal conclusions, has been reviewed by such counsel and accurately and fairly
summarizes in such counsel's opinion the matters described therein and to the
knowledge of such counsel, there are no outstanding options, warrants,
convertible securities, or other rights to acquire from the Company any capital
stock, except as
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described in the Registration Statement; in addition, the forms of certificates
evidencing the Company stock comply with Colorado law.
(xiii) To such counsel's knowledge, except as set forth in the
Prospectus, there is not pending or threatened any action, suit, proceeding,
inquiry or investigation, to which the Company or its Subsidiaries is a party,
or to which the property of the Company or its Subsidiaries is subject, before
or brought by any court or government agency or body, which might reasonably be
expected to result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of this Agreement or the performance by the
Company of its obligations hereunder; and all pending legal or governmental
proceedings to which the Company or its Subsidiaries is a party or that affect
any of their respective properties that are not described in the Prospectus,
including ordinary routine litigation incidental to the business, could not
reasonably be expected to result in a material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its Subsidiaries considered as one enterprise.
(xiv) The information in the Prospectus under the captions
"Business - Legal Proceedings", " - Governmental Regulation", "Certain
Transactions" and "Description of Capital Stock" in the Prospectus and Items 24
and 26 of Part II of the Registration Statement, to the extent that such items
constitute matter of law, summaries of legal matters, documents or proceedings,
or legal conclusions, has been reviewed by them and is correct in all material
respects, and there are no legal or governmental actions, suits or proceedings
pending or threatened against the Company or its Subsidiaries that are required
to be described in the Prospectus but are not described as required by the
Securities Act or the applicable Rules and Regulations.
(xv) All descriptions in the Prospectus of contracts and other
documents are accurate in all material respects; to their knowledge, there are
no agreements, no contracts, indentures, mortgages, loan agreements, notes,
leases or other instrument required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed as exhibits thereto.
(xvi) No authorization, approval, consent or order of any
court or governmental authority or agency (other than under the Securities Act
or the Rules and Regulations, which have been obtained, or as may be required
under the securities or Blue Sky laws of the various states or foreign
jurisdiction) is required in connection with the due authorization, execution
and delivery of this Agreement or for the offering, issuance or sale of the
Shares to the Underwriters; and the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein and
compliance by the Company with its obligations hereunder (other than performance
of the Company's indemnification and contribution obligations hereunder,
concerning which no opinion need be expressed) will not, whether with or without
the giving of notice or lapse of time or both, conflict with or constitute a
breach or violation of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or its Subsidiaries pursuant to any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument (A) which is an
exhibit to the Registration Statement and (B) to which the Company or its
Subsidiaries is a party or by which it or
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any of them may be bound, or to which any of the property or assets of the
Company or its Subsidiaries is subject, nor will such action result in any
violation of the provisions of the Articles of Incorporation or Bylaws of the
Company, or any applicable law, administrative regulation or court decree,
provided, however, no opinion need be rendered concerning state securities or
Blue Sky laws.
(xvii) To counsel's knowledge, with the exception of the
Managing Underwriter's Warrants and any registration rights mentioned in the
Registration Statement, no holder of any security of the Company has any right
to require registration of any shares of Common Stock or any other security of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights to
registration of such shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement, or have included securities in the Registration
Statement pursuant to the exercise of such rights.
(xviii) The Company is not an "investment company" or an
entity "controlled" by an "investment company" as such terms are defined in the
1940 Act.
(xix) To counsel's knowledge, neither the Company nor its
Subsidiaries are in violation of their charter or by-laws.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions) on certificates of responsible officers of the
Company and public officials. All references in the above opinions to "such
counsel's knowledge" or "known to us" or similar phrases mean the conscious
awareness of facts or other information by the lawyer who signs this opinion and
other lawyers at our firm who have active involvement in representing the
Company, including any awareness that results from counsel's work on the
Registration Statement. The opinions of counsel may be based on the current laws
of the United States of America and the State of Colorado and need not include
an interpretation or statement concerning the laws of any other state or
jurisdiction. 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 with limitation, the
Legal Opinion Accord of the ABA Section of Business Law (1991).
In giving their opinion required by subsection (d)(1) of this Section,
Hollard & Hart LLP shall additionally state that nothing has come to their
attention that would lead them to believe that the Registration Statement, at
the time it became effective, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus, at the
effective date of the Registration Statement (unless the term "Prospectus"
refers to a prospectus which has been provided to the Underwriters by the
Company for use in connection with the offering of the Shares which differs from
the Prospectus declared effective by the Commission, in which case at the time
it is first provided to the Underwriters for such use) or at the Closing Date,
included an untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Such opinion may state
that such counsel does not assume any responsibility for the accuracy,
completeness or fairness of
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the statements contained in the Registration Statement and the Prospectus except
as otherwise expressly provided in such opinion, and such counsel need express
no opinion or belief as to the financial statements, schedules, and other
financial or statistical data included in the Registration Statement or
Prospectus.
(2) The opinion, dated as of Closing Date, of McAfee & Taft A
Professional Corporation, counsel for the Underwriters, in form and substance
satisfactory to you, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such papers, opinions and information as
they request to enable them to pass upon such matters.
(e) At the time of the execution of this Agreement, the Underwriters shall
have received from Arthur Andersen LLP a letter dated such date, in form and
substance satisfactory to the Underwriters, to the effect that:
(1) they are independent public accountants with respect to the
Company and its Subsidiaries within the meaning of the Securities Act and the
Rules and Regulations;
(2) it is their opinion that the consolidated balance sheet included
in the Registration Statement and covered by their opinion therein complies as
to form in all material respects with the applicable accounting requirements of
the Securities Act and the Rules and Regulations;
(3) based upon limited procedures set forth in detail in such
letter, nothing has come to their attention which causes them to believe that,
at a specified date not more than three days prior to the date of this
Agreement, (A) the unaudited consolidated balance sheet of the Company and its
Subsidiaries included in the Registration Statement does not comply as to form
in all material respects with the applicable accounting requirements of the
Securities Act and the Rules and Regulations or is not presented in conformity
with generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included in the
Registration Statement, or (B) at a specified date not more than three days
prior to the date of this Agreement, there has been any change in the capital
stock of the Company or any increase in the combined long term debt of the
Company and its Subsidiaries or any decrease in combined net current assets or
net assets as compared with the amounts shown in the June 30, 1999 balance sheet
included in the Registration Statement or, during the period from June 30, 1999,
to a specified date not more than three days prior to the date of this
Agreement, there were any decreases, as compared with the corresponding period
in the preceding year, in combined revenues, net income or net income per share
of the Company and its Subsidiaries, except in all instances for changes,
increases or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur;
(4) in addition to the examination referred to in their opinion and
the limited procedures referred to in clause (3) above, they have carried out
certain specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are included in the
Registration Statement and Prospectus and which are specified by the
Underwriters, and have found such amounts, percentages and financial information
to be in
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agreement with the relevant accounting, financial and other records of the
Company and its Subsidiaries identified in such letter; and
(5) they have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-B and on the
basis of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to believe
that this information does not conform in all material respects with the
disclosure requirements of Item 402 of Regulation S-B.
(f) At the Closing Date, the Underwriters shall have received from Arthur
Andersen LLP a letter, dated as of the Closing Date, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection (e)
of this Section 6, except that the specified date referred to shall be a date
not more than three days prior to the Closing Date and, if the Company has
elected to rely on Rule 430A of the 1933 Act Regulations, to the further effect
that they have carried out procedures as specified in clause (4) of subsection
(e) of this Section 6 with respect to certain amounts, percentages and financial
information specified by the Underwriters and deemed to be a part of the
Registration Statement pursuant to Rule 430(A)(b) and have found such amounts,
percentages and financial information to be in agreement with the records
specified in such clause (4).
(g) At the Closing Date, the Common Stock shall have been approved for
listing on the Nasdaq SmallCap Market and the Boston Stock Exchange.
(h) In the event that the Underwriters exercise their option provided in
Section 7 hereof to purchase all or any portion of the Option Shares, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company hereunder shall be true
and correct as of the Option Closing Date and, at the Option Closing Date, the
Underwriters shall have received:
(1) A certificate, dated the Option Closing Date, of the President
or a Vice President of the Company and of the Chief Financial or Chief
Accounting Officer of the Company confirming that the certificate delivered at
the Closing Date pursuant to Section 5(c) hereof remains true and correct as of
the Option Closing Date (except that all references in such Section to "Closing
Date" shall be deemed to refer to the "Option Closing Date").
(2) The opinions of Holland & Hart LLP, counsel for the Company, in
form and substance satisfactory to counsel for the Underwriters, dated the
Option Closing Date, relating to the Option Shares and otherwise to the same
effect as the opinion required by Section 5(b)(1) hereof (except that all
references in such Section to "Closing Date" shall be deemed to refer to the
"Option Closing Date").
(3) The opinion of McAfee & Taft A Professional Corporation, counsel
for the Underwriters, dated the Option Closing Date, relating to the Option
Shares to be purchased on the Option Closing Date and otherwise to the same
effect as the opinion required by Section 5(b)(2) hereof (except that all
references in such Section to "Closing Date" shall be deemed to refer to the
"Option Closing Date").
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(4) A letter from Arthur Andersen in form and substance satisfactory
to the Underwriters and dated the Option Closing Date, substantially the same in
form and substance as the letter furnished to the Underwriters pursuant to
Section 5(e) hereof, except that the "specified date" in the letter furnished
pursuant to this Section 6(h)(4) shall be a date not more than three days prior
to the Option Closing Date.
(i) The Company and the Underwriters shall have entered into the Warrant
Agreement and the Company shall have sold to the Underwriters the Underwriters'
Warrants, which shall be in the form attached as an exhibit to the Warrant
Agreement.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Representative by notice to the Company at any time at or prior to Closing Date,
and such termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 4(i) and 8 shall
survive any such termination and remain in full force and effect.
7. OPTION SHARES.
(a) On the basis of the representations and warranties herein contained,
but subject to the terms and conditions herein set forth, the Company hereby
grants to the several Underwriters, for the purpose of covering over-allotments
in connection with the distribution and sale of the Firm Shares only, a
non-transferable option to purchase up to an aggregate 180,000 Option Shares at
the purchase price per share for the Firm Shares set forth in Section 3 hereof.
Such option may be exercised by Kashner on behalf of the several Underwriters on
one occasion in whole or in part during the period of 45 business days from and
after the date on which the Firm Shares are initially offered to the public, by
giving notice to the Company. The number of Option Shares to be purchased by
each Underwriter upon the exercise of such option shall be the same proportion
of the total number of Option Shares to be purchased by the several Underwriters
pursuant to the exercise of such option as the number of Firm Shares purchased
by such Underwriter (set forth in SCHEDULE A hereto) bears to the total number
of Firm Shares purchased by the several Underwriters (set forth in SCHEDULE A
hereto), adjusted by the Underwriters in such manner as to avoid fractional
shares.
Delivery of definitive certificates for the Option Shares to be purchased
by the several Underwriters pursuant to the exercise of the option granted by
this Section 7 shall be made against payment of the purchase price therefor by
the several Underwriters by certified or official bank check or checks drawn in
same day funds, payable to the order of the Company. Such delivery and payment
shall take place at the offices of Kashner Davidson Securities Corporation, 77
South Palm Avenue, Sarasota, Florida 34236 or at such other place as may be
agreed upon between the Underwriters and the Company on the Closing Date, if
written notice of the exercise of such option is received by the Company not
later than three full business days prior to the Closing Date.
The certificates for the Options Shares so to be delivered will be made
available to you at such office or other location including, without limitation,
inNew York, as you may reasonably request for checking at least two full
business days prior to the date of payment and delivery and will be in such
names and denominations as you may request, such request to be made at least
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three full days prior to such date of payment and delivery. If the Underwriters
so elect, delivery of the Shares may be made by credit through full fast
transfer to the accounts at Depository Trust Company by the Underwriters.
It is understood that Kashner, individually, and not as the representative
of the Underwriters, may (but shall not be obligated to) make payment of the
purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the date of payment and
delivery for the Option Shares to be purchased by such Underwriter or
Underwriters. Any such payment by Kashner shall not relieve any Underwriter of
any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof the
obligations of the Underwriters to purchase such Option Shares will be subject
(as of the date hereof and as of the date of payment for such Option Shares) to
the accuracy of and compliance with the representations and warranties of the
Company herein, to the accuracy of the statements of the Company and officers of
the Company made pursuant to the provisions hereof, to the performance by the
Company of their respective obligations hereunder, and to the condition that all
proceedings taken at or prior to the payment date in connection with the sale
and transfer of such Option Shares shall be satisfactory in form and substance
to you and to Underwriters' counsel, and you shall have been furnished with all
such documents, certificates and opinions as you may reasonably request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants of the Company
or the compliance with any of the conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, as
incurred, to which such Underwriter may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of the Company herein contained,
or (ii) any untrue statement or alleged untrue statement made by the Company in
Section 2 hereof, or (iii) any untrue statement or alleged untrue statement of a
material fact contained (A) in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (B) in any
blue sky application or other document executed by the Company specifically for
that purpose or based upon written information furnished by the Company filed in
any state or other jurisdiction in order to qualify any or all of the Shares
under the securities laws thereof (any such application, documents or
information being hereinafter called a "Blue Sky Application"), or (iii) the
omission or alleged omission to state in the Registration Statement or any
amendment thereto a material fact required to be stated therein or necessary to
make the statements therein not misleading, or the omission or alleged omission
to state in any Preliminary Prospectus, the Prospectus or any supplement thereto
or in any Blue Sky Application a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and shall reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action,
notwithstanding the
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possibility that payments for such expenses might later be held to be improper,
in which case the person receiving them shall promptly refund them; except that
the Company shall not be liable in any such case to the extent, but only to the
extent, that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, such Preliminary Prospectus or the
Prospectus, or any amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any
Underwriter specifically for use in the preparation thereof and, provided
further, that the indemnity agreement provided in this Section 8(a) with respect
to any Preliminary Prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any losses, claims, charges, liabilities or
litigation based upon any untrue statement or alleged untrue statement of
material fact or omission or alleged omission to state therein a material fact
purchased Shares, if a copy of the Prospectus in which such untrue statement or
alleged untrue statement or omission or alleged omission was corrected has not
been sent or given to such person within the time required by the Securities Act
and the Rules and Regulations thereunder, unless such failure is the result of
noncompliance by the Company with Section 4(d) hereof.
(b) Each Underwriter severally, but not jointly, shall indemnify and hold
harmless the Company against any losses, claims, damages or liabilities, joint
or several, as incurred, to which the Company may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of a material fact contained
(A) in the Registration Statement, Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (B) in any Blue Sky Application, or (ii) the
omission or alleged omission to state in the Registration Statement or any
amendment thereto a material fact required to be stated therein or necessary to
make the statements therein not misleading, or the omission or alleged omission
to state in any Preliminary Prospectus, the Prospectus or any supplement thereto
or in any Blue Sky Application a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; except that such indemnification
shall be available in each such case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company through the Underwriters by or on behalf of such
Underwriter specifically for use in the preparation thereof; and shall reimburse
any legal or other expenses reasonably incurred by the Company in connection
with investigation or defending against any such loss, claim, damage, liability
or action.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the claim or the commencement of that action; the failure to notify
the indemnifying party shall not relieve it from any liability which it may have
to an indemnified party otherwise than under such subsection. If any such claim
or action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party; provided, however, if
the defendants in any
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such action include both the indemnified parties and the indemnifying party and
the indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. After notice from the indemnifying
party to the indemnified party of its election to assume the defense of such
claim or action, the indemnifying party shall not be liable to the indemnified
party under such subsection for any legal or other expenses subsequently
incurred by the indemnified party in connection with the defense thereof unless
(i) the indemnified party shall have employed separate counsel in accordance
with the proviso to the preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party, representing all the indemnified parties under Section 8(a)
and 8(b) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the claim or action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided, however, that
such consent shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in any action
in which a claim for indemnification is made pursuant to this Section 8 for
which it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company is responsible for the remaining portion; provided, however, that (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter,
and (ii) no person guilty of a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to a contribution from
any person who is not guilty of such fraudulent misrepresentation. This
subsection (d) shall not be operative as to any Underwriter to the extent that
the Company has received indemnity under this Section 8.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have, and shall
extend, upon the same terms and conditions, to each officer and director of each
Underwriter and to each person, if any, who controls any Underwriter within the
meaning of the Securities Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability that the respective
Underwriters may otherwise have, and shall extend, upon the same terms and
conditions, to each director of the Company (including any person who, with his
consent, is named in the Registration Statement as about to become a director of
the Company), to each officer of the
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Company who has signed the Registration Statement and to each person, if any,
who controls the Company within the meaning of the Securities Act, in either
case, whether or not such person is a party to any action or proceeding.
(f) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including without limitation the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Securities Act and the
Exchange Act. The parties are advised that Federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
of the provisions of this Section 8, and the parties hereto hereby expressly
waive and relinquish any right or ability to assert such public policy as a
defense to a claim under this Section 8 and further agree not to attempt to
assert any such defense.
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, covenants and agreements of the Company contained
in this Agreement (including, without limitation, the agreements of the Company
set forth in Sections 4(i)-(k)), or contained in certificates of officers of the
Company submitted pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof, shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or controlling person, or by or on behalf of the Company, or any of its
officers, controlling persons or directors and shall survive delivery of the
Shares to the several Underwriters hereunder or termination of this Agreement.
10. SUBSTITUTION OF UNDERWRITER. If any Underwriter or Underwriters shall
fail to take up and pay for the number of Firm Shares agreed by such Underwriter
or Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof, and if the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number of
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four hours to allow the several Underwriters the privilege of
substituting within twenty-four hours (including non-business hours) another
underwriter or underwriters (which may include any non-defaulting Underwriter)
satisfactory to the Company. If no such underwriter or underwriters shall have
been substituted as aforesaid by such postponed Closing Date, the Closing Date
may, at the option of the Company, be postponed for a further twenty-four hours,
if necessary to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to
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you, to purchase the Firm Shares which the defaulting Underwriter or
Underwriters so agreed but failed to purchase. If it shall be arranged for the
remaining Underwriters or substituted underwriters to take up the Firm Shares of
the defaulting Underwriter or Underwriters as provided in this Section, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven full business days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or in
any other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective number of Firm Shares to
be purchased by the remaining Underwriters and substitute underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Firm Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the preceding
paragraph of this Section, neither the Company shall be liable to any
Underwriter (except as provided in Sections 5 and 8 hereof )nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the later of (i) execution of
this Agreement, or (ii) when notification of the effectiveness of the
Registration Statement has been released by the Commission.
(b) Kashner shall have the right to terminate this Agreement by giving
notice as hereinafter specified at any time at or prior to the Closing Date (i)
if the Company shall have failed, refused or been unable, to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company is
not fulfilled including, without limitation, any change in the financial
condition, earnings, operations, business, management, technical staff, or
business prospects of the Company from that set forth in the Registration
Statement or Prospectus which, in the sole judgment of Kashner, is material and
adverse, or (ii) if trading on the American Stock Exchange or the Nasdaq
National Market shall have been suspended, or minimum or maximum prices for
trading shall have been fixed, or maximum ranges for prices for securities shall
have been required on the American Stock Exchange or the Nasdaq National Market,
by the American Stock Exchange, the Nasdaq National Market or by order of the
Commission or any other governmental authority having jurisdiction, or if a
banking moratorium shall have been declared by Federal, New York or Oklahoma
authorities, or (iii) if on or prior to the Closing Date, or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, the
Company shall have sustained a loss by strike, fire, flood,
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earthquake, accident or other calamity of such character as to interfere
materially and adversely with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets in the United States as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if on or prior to the Closing
Date, or on or prior to any later date on which Option Shares are to be
purchased, as the case may be, there shall have been an outbreak or escalation
of hostilities or other international or domestic calamity, crises or material
adverse change in political, financial or economic conditions, the effect of
which on the financial markets of the United States is such as to make it in
your reasonable judgment, inadvisable to proceed with the marketing of the
Shares. In the event of termination pursuant to this Section 11(b), the Company
shall remain obligated to pay costs and expenses pursuant to Section 4(j), 5 and
8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone or telecopy, in each case confirmed by letter.
If the Company shall elect to prevent this Agreement from becoming effective,
the Company shall promptly notify you by telephone or telecopy, in each case,
confirmed by letter.
12. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given if mailed or transmitted by any
standard form of telecommunication. Notices to the Underwriters shall be
directed to the Underwriters in care of Kashner Davidson Securities Corporation,
77 South Palm Avenue, Sarasota, Florida 34236, Attention: Matthew B. Meister;
notices to the Company shall be directed to it at Training Devices
International, Inc., 7367 S. Revere Parkway, Building #2-C, Englewood, Colorado
80112-3931, Attention: Ronald C. Ellington.
13. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and their respective executors,
administrators, successors, and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or corporation,
other than the parties hereto and their respective executors, administrators,
successors, and assigns and the controlling persons and officers and directors
referred to in Section 8 hereof any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provisions herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors, and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or corporation.
No purchaser of the Shares from any Underwriter shall be construed to be a
successor by reason merely of such purchase.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado applicable to agreements made
and to be performed in said State. Specified times of day refer to Eastern time.
15. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
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<PAGE>
If the foregoing correctly sets forth your understanding of our agreement,
please sign in the space provided below for that purpose, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters and the Company in accordance with its terms
*******
30
<PAGE>
TRAINING DEVICES INTERNATIONAL, INC.
By:
------------------------------------
CONFIRMED AND ACCEPTED, as of the date first above written:
KASHNER DAVIDSON
SECURITIES CORPORATION
By:
------------------------
31
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
UNDERWRITER SHARES PURCHASED
----------- ----------------
<S> <C>
Kashner Davidson Securities Corporation
Total number of shares
</TABLE>
32
<PAGE>
May__, 2000
KASHNER DAVIDSON SECURITIES CORPORATION
77 South Palm Avenue
Sarasota, Florida 34236
Ladies and Gentlemen:
Training Devices International, Inc. (the "Company"), agrees to issue and
sell to you warrants (the "Warrants") to purchase the number of shares of common
stock, no par value per share (the "Common Stock"), of the Company set forth
herein, subject to the terms and conditions contained herein
1. ISSUANCE OF WARRANTS; EXERCISE PRICE. The Warrants, which shall be in
the form attached hereto as Exhibit A, shall be issued to you concurrently with
the execution hereof in consideration of the payment by you to the Company of
the sum of Ten Dollars ($10.00), the receipt and sufficiency of which are hereby
acknowledged. The Warrant shall provide that you, or such other holder or
holders of the Warrants to whom transfer is authorized in accordance with the
terms of this Agreement, shall have the right to purchase an aggregate of
120,000 shares of Common Stock for an exercise price equal to [$8.40] per share
(the "Exercise Price"). The number, character and Exercise Price of such shares
of Common Stock are subject to adjustment as hereinafter provided, and the term
"Common Stock" shall mean, unless the context otherwise requires, the stock and
other securities and property receivable upon exercise of the Warrants. The term
"Exercise Price" shall mean, unless the context otherwise requires, the price
per share of the Common Stock purchasable under the Warrants as set forth in
this Section 1, as adjusted from time to time pursuant to Section 6.
2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to
you and to each subsequent holder of Warrants and agrees that:
(a) This Agreement has been duly authorized, executed and delivered by the
Company and constitutes the valid and binding obligation of the Company
enforceable in accordance with its terms; and neither the issuance of the
Warrants nor the issuance of the shares of Common Stock issuable upon exercise
of the Warrants will result in a breach or violation of any terms or provisions
of, or constitute a default under, any contract, indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company is a
party or by which the Company is bound or the Articles of Incorporation or
Bylaws of the Company, or any law, order, rule, regulation or decree of any
government, governmental instrumentality or court, domestic or foreign, or
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company.
(b) No consent, approval, authorization or order of any court or
governmental agency or body is required for the sale and issuance of the
Warrants or the sale and issuance of the shares of Common Stock issuable upon
exercise of the Warrants, except such as have been obtained or may be required
under the Securities Act of 1933, as amended (the "Act"), and such as may be
<PAGE>
required under state securities or blue sky laws in connection with the issuance
of the Warrants and the shares of Common Stock issuable upon exercise of the
Warrants. Upon exercise of the Warrants by the holder thereof, the shares of
Common Stock with respect to which the Warrants are exercised will be validly
issued, fully paid, and non-assessable, and good and marketable title to such
shares of Common Stock shall be delivered to such holder free and clear of all
liens, encumbrances, equities, claims or preemptive or similar rights.
(c) During the term of this Agreement, the Company shall make timely
filings of all periodic and other reports and forms and other materials required
(but only to the extent required) to be filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Act or the Securities Exchange Act
of 1934, as amended, and with any national securities exchange or quotation
system upon which any of the securities of the Company may be listed.
3. NOTICES OF RECORD DATE; ETC. In the event of (i) any taking by the
Company of a record date with respect to the holders of any class of securities
of the Company for purposes of determining which of such holders are entitled to
dividends or other distributions (other than regular quarterly dividends), or
any right to subscribe for, purchase or otherwise acquire shares of stock of any
class or any other securities or property, or to receive any other right, (ii)
any capital reorganization of the Company, or reclassification or
recapitalization of capital stock of the Company or any transfer in one or more
related transactions of all or a majority of the assets or revenue or income
generating capacity of the Company to, or consolidation or merger of the Company
with or into, any other entity or person, or (iii) any voluntary or involuntary
dissolution or winding up of the Company, then and in each such event the
Company will mail or cause to be mailed to each holder of a Warrant at the time
outstanding a notice specifying, as the case may be, (A) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution or
right; or (B) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, conveyance, dissolution,
liquidation or winding up is to take place and the time, if any is to be fixed,
as of which the holders of record of Common Stock (or any other class of stock
or securities of the Company, or another issuer pursuant to Section 6,
receivable upon the exercise of the Warrants) shall be entitled to exchange
their shares of Common Stock (or such other stock or securities) for securities
or other property deliverable upon such event. Any such notice shall be
deposited in the United States mail, postage prepaid, at least ten (10) days
prior to the date therein specified, and the holders(s) of the Warrant(s) may
exercise the Warrant(s) and participate in such event as a registered holder of
Common Stock, upon exercise of the Warrant(s) so held, within the ten (10) day
period from the date of mailing of such notice.
4. NO IMPAIRMENT. The Company shall not, by amendment of its organizational
documents or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other action, avoid or
seek to avoid the observance or performance of any of the terms of this
Agreement or of the Warrants, but will at all times in good faith take any and
all action as may be necessary in order to protect the rights of the holders of
the Warrants against impairment. Without limiting the generality of the
foregoing, the Company (a) will at all times reserve and keep available, solely
for issuance and delivery upon exercise of the Warrants, shares of Common Stock
issuable from time to time upon exercise of the Warrants, (b) will not increase
the par value of any shares of stock receivable upon exercise
2
<PAGE>
of the Warrants above the amount payable in respect thereof upon such exercise,
and (c) will take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and non-assessable
stock upon the exercise of the Warrants, or any of them.
5. EXERCISE OF WARRANTS. At any time and from time to time on and after the
first anniversary of the effective date of the Company's initial public offering
and expiring on the fifth anniversary of the effective date of the Company's
initial public offering of the Common Stock at 5:00 p.m., Sarasota, Florida
time, Warrants may be exercised as to all or any portion of the whole number of
shares of Common Stock covered by the Warrants by the holder thereof by
surrender of the Warrants, accompanied by a subscription for shares to be
purchased in the form attached hereto as Exhibit B and by a check payable to the
order of the Company in the amount required for purchase of the shares as to
which the Warrant is being exercised, delivered to the Company at its principal
office at 7367 S. Revere Parkway, Bldg. #2C, Denver, Colorado 80112, Attention:
President, or any substitute address where notice is to be given in accordance
with Section 12. Warrants may also be exercised from time to time, without any
payment required for the purchase of the shares as to which the Warrant is being
exercised, as to all or any portion of the number of shares of Common Stock
covered by the Warrant(s) by the holder thereof by surrender of the Warrants,
accompanied by a subscription for shares in the form attached as Exhibit C,
pursuant to which the holder thereof will be entitled to receive upon such
surrender of the Warrant(s) (and without any further payment) that number of
shares of Common Stock equal to the product of the number of shares of Common
Stock obtainable upon exercise of the Warrant(s) (or the portion thereof as to
which the exercise relates) multiplied by a fraction: (i) the numerator of which
shall be the difference between the then Current Value (as defined in this
Section 5 and Section 7(d)) of one full share of Common Stock on the date of
exercise and the Exercise Price, and (ii) the denominator of which shall be the
Current Value of one full share of Common Stock on the date of exercise. Upon
the exercise of a Warrant in whole or in part, the Company will within five (5)
days thereafter, at its expense (including the payment by the Company of any
applicable issue or transfer taxes), cause to be issued in the name of and
delivered to the Warrant holder a certificate or certificates for the number of
fully paid and non-assessable shares of Common Stock to which such holder is
entitled upon exercise of the Warrant. In the event such holder is entitled to a
fractional share, in lieu thereof such holder shall be paid a cash amount equal
to such fraction, multiplied by the Current Value of one full share of Common
Stock on the date of exercise. Certificates for shares of Common Stock issuable
by reason of the exercise of the Warrant or Warrants shall be dated and shall be
effective as of the date of the surrendering of the Warrant for exercise,
notwithstanding any delays in the actual execution, issuance or delivery of the
certificates for the shares so purchased. In the event a Warrant or Warrants is
exercised as to less than the aggregate amount of all shares of Common Stock
issuable upon exercise of all Warrants held by such person, the Company shall
issue a new Warrant to the holder of the Warrant so exercised covering the
aggregate number of shares of Common Stock as to which Warrants remain
unexercised.
For purposes of this section, Current Value is defined (i) in the case for
which a public market exists for the Common Stock at the time of such exercise,
according to Section 7(d), and (ii) in the case no public market exists at the
time of such exercise, at the Appraised Value. For the purposes of this
Agreement, "Appraised Value" is the value determined in accordance with the
following procedures. For a period of five (5) days after the date of an event
(a "Valuation
3
<PAGE>
Event") requiring determination of Current Value at a time when no public market
exists for the Common Stock (the "Negotiation Period"), the Company and the
Warrant holder for whom the Appraised Value is to be determined agree to
negotiate in good faith to reach agreement upon the Appraised Value of the
securities or property at issue, as of the date of the Valuation Event, which
will be the fair market value of such securities or property, without premium
for control or discount for minority interests, illiquidity or restrictions on
transfer. In the event that the parties are unable to agree upon the Appraised
Value of such securities or other property by the end of the Negotiation Period,
then the Appraised Value of such securities or property will be determined for
purposes of this Agreement by a recognized appraisal or investment banking firm
mutually agreeable to the holders of the Warrants and the Company (the
"Appraiser"). If the holders of the Warrants and the Company cannot agree on an
Appraiser within two (2) business days after the end of the Negotiation Period,
the Company, on the one hand, and the holders of the Warrants, on the other
hand, will each select an Appraiser within ten (10) business days after the end
of the Negotiation Period and those two Appraisers will select within ten (10)
days after the end of the Negotiation Period an independent Appraiser to
determine the fair market value of such securities or property, without premium
for control or discount for minority interests. Such independent Appraiser will
be directed to determine fair market value of such securities or property as
soon as practicable, but in no event later than thirty (30) days from the date
of its selection. The determination by an Appraiser of the Appraised Value fair
market value will be conclusive and binding on all parties to this Agreement.
Appraised Value of each share of Common Stock at a time when (i) the Company is
not a reporting company under the Exchange Act and (ii) the Common Stock is not
traded in the organized securities markets, will, in all cases, be calculated by
determining the Appraised Value of the entire Company taken as a whole and
dividing that value by the number of shares of Common Stock then outstanding,
without premium for control or discount for minority interests, illiquidity or
restrictions on transfer. The costs of the Appraiser will be borne by the
Company. In no event will the Appraised Value of the Common Stock be less than
the per share consideration received or receivable with respect to the Common
Stock or securities or property of the same class in connection with a pending
transaction involving a sale, merger, recapitalization, reorganization,
consolidation, or share exchange, dissolution of the Company, sale or transfer
of all or a majority of its assets or revenue or income generating capacity. or
similar transaction.
6. PROTECTION AGAINST DILUTION. The Exercise Price for the shares of Common
Stock and number of shares of Common Stock issuable upon exercise of the
Warrants is subject to adjustment from time to time as follows:
(a) ADJUSTMENT OF NUMBER OF WARRANT SHARES ISSUABLE. Upon each adjustment
of the Exercise Price pursuant to this SECTION 6, the holder of a Warrant shall
be entitled to purchase, at the Exercise Price in effect after such adjustment,
a number of Warrant Shares equal to the amount obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of such Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(b) ADJUSTMENT OF PRICE UPON ISSUANCE OF COMMON STOCK. If and whenever
after the date hereof, the Company shall issue or sell any shares of Common
Stock for a consideration per share less than Current Value at the time of such
issue or sale, then forthwith upon such issue or sale, the Exercise Price shall
be reduced to the price (calculated to the nearest cent) determined
4
<PAGE>
by multiplying the Exercise Price in effect immediately prior to the time of
such issue or sale by a fraction, the numerator of which shall be the sum of (A)
the number of shares of Common Stock outstanding immediately prior to such issue
or sale multiplied by the Current Value immediately prior to such issue or sale
plus (B) the consideration received by the Company upon such issue or sale, and
the denominator of which shall be the product of (C) the total number of shares
of Common Stock outstanding immediately after such issue or sale, multiplied by
(D) the Current Value immediately prior to such issue or sale.
No adjustment of any Exercise Price, however, shall be made in an amount less
than 1% of the Exercise Price, but any such lesser adjustment shall be carried
forward and shall be made at the time of, and together with, the next subsequent
adjustment which together with any adjustments so carried forward shall amount
to at least 1% of the Exercise Price.
(c) ADDITIONAL ADJUSTMENTS. For the purposes of SUBSECTION (b) of this
SECTION 6, the following clauses shall also be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. In case at any time the Company
shall grant (whether directly or by assumption in a merger in which the
Company is the surviving Company or otherwise) any rights (other than the
Warrants) to subscribe for or to purchase, or any options for the purchase
of, Common Stock or any stock or securities convertible into or
exchangeable for Common Stock (such convertible or exchangeable stock or
securities being herein called "CONVERTIBLE SECURITIES") whether or not
such rights or options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon the exercise of such rights or
options or upon conversion or exchange of such Convertible Securities
(determined as provided below) shall be less than 100% of the Current Value
determined as of the date of granting such rights or options, then the
total maximum number of shares of Common Stock issuable upon the exercise
of such rights or options or upon conversion or exchange of the total
maximum amount of such Convertible Securities issuable upon the exercise of
such rights or options shall (as of the date of granting of such rights or
options) be deemed to be outstanding and to have been issued for such price
per share, and the Exercise Price shall be adjusted in accordance with
SECTION 6(b). Except as provided in CLAUSE (III) of this SUBSECTION, no
further adjustments of any Exercise Price shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon exercise
of such rights or options or upon the actual issue of such Common Stock
upon conversion or exchange of such Convertible Securities. For the
purposes of this CLAUSE (I), the price per share for which Common Stock is
issuable upon the exercise of any such rights or options or upon conversion
or exchange of any such Convertible Securities shall be determined by
dividing (A) the total amount, if any, received or receivable by the
Company as consideration for the granting of such rights or options, plus
the minimum aggregate amount of additional consideration payable to the
Company upon the exercise of all such rights or options, plus, in the case
of such rights or options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable upon
the issue or sale of such Convertible Securities and upon the conversion or
exchange thereof, by (B) the total maximum number of shares of Common Stock
5
<PAGE>
issuable upon the exercise of such rights or options or upon conversion or
exchange of all such Convertible Securities issuable upon the exercise of
such rights or options.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES. In case the Company shall
issue (whether directly or by assumption in a merger in which the Company
is the surviving Company or otherwise) or sell any Convertible Security,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable
upon conversion or exchange of such Convertible Securities (determined as
provided below) shall be less than 100% of the Current Value, determined as
of the date of such issue or sale of such Convertible Securities, as the
case may be), then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible Securities)
be deemed to be outstanding and to have been issued for such price per
share, and the Exercise Price shall be adjusted in accordance with SECTION
6(b), provided that (A) except as provided in CLAUSE (iii) of this
subsection, no further adjustments of any Exercise Price shall be made upon
the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities, and (B) if any such issue or sale of such
Convertible Securities is made upon exercise of any rights to subscribe for
or to purchase or any option to purchase any such Convertible Securities
for which adjustments of any Exercise Price have been or are to be made
pursuant to other provisions of this SUBSECTION (c), no further adjustment
of any Exercise Price shall be made by reason of such issue or sale. For
the purposes of this CLAUSE (ii), the price per share for which Common
Stock is issuable upon conversion or exchange of Convertible Securities
shall be determined by dividing (C) the total amount, if any, received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (D) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible
Securities.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase price
provided for in any rights or options referred to in CLAUSE (i) above, or
the additional consideration, if any, payable upon the conversion or
exchange of Convertible Securities referred to in CLAUSE (i) or (ii) above,
or the rate at which any Convertible Securities referred to in CLAUSE (i)
or (ii) above are convertible into or exchangeable for Common Stock, shall
change (other than under or by reason of provisions designed to protect
against dilution), then the Exercise Price in effect at the time of such
event shall forthwith be readjusted to the Exercise Price which would have
been in effect at such time had such rights, options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold; and on the expiration of any such
option or right or the termination of any such right to convert or exchange
such Convertible Securities, the Exercise Price then in effect hereunder
shall forthwith be increased to the Exercise Price which would have been in
effect at the time of such expiration or termination had such right, option
or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any
6
<PAGE>
such right or option referred to in CLAUSE (i) above or the rate at which
any Convertible Securities referred to in CLAUSE (i) or (ii) above are
convertible into or exchangeable for Common Stock, shall decrease at any
time under or by reason of provisions with respect thereto designed to
protect against dilution, then in case of delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of any
such Convertible Security, the Exercise Price then in effect hereunder
shall forthwith be adjusted to such respective amount as would have
obtained had such right, option or Convertible Security never been issued
as to such Common Stock and had adjustments been made upon the issuance of
the share of Common Stock delivered as aforesaid, but only if as a result
of such adjustment the Exercise Price then in effect hereunder is thereby
decreased.
(iv) STOCK DIVIDENDS. In case the Company shall declare a dividend or
make any other distribution upon any stock of the Company payable in Common
Stock or Convertible Securities, any Common Stock or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration and the Exercise Price shall be adjusted in accordance with
SECTION 6(b).
(v) CONSIDERATION FOR STOCK. In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase any such Common
Stock or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Company therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by
the Company in connection therewith. In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase any such Common
Stock or Convertible Securities shall be issued or sold for a consideration
other than cash, the amount of the consideration other than cash received
by the Company shall be deemed to be the fair value of such consideration
as determined reasonably and in good faith by the board of directors of the
Company, without deduction of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Company in connection
therewith. In case any shares of Common Stock or Convertible Securities or
any rights or options to purchase such shares of Common Stock or
Convertible Securities shall be issued in connection with any merger or
consolidation in which the Company is the surviving corporation (other than
any consolidation or merger in which the previously outstanding shares of
Common Stock of the Company shall be changed into or exchanged for the
stock or other securities of another corporation), the amount of
consideration therefor shall be deemed to be the fair value as determined
reasonably and in good faith by the board of directors of the Company or
such portion of the assets and business of the non-surviving corporation as
such board may reasonably and in good faith determine to be attributable to
such shares of Common Stock, Convertible Securities, rights or options, as
the case may be. In the event of any consolidation or merger of the Company
in which the Company is not the surviving corporation or in which the
previously outstanding shares of Common Stock of the Company shall be
changed into or exchanged for the stock or other securities of another
entity or in the event of any sale of all or substantially all of the
assets of the Company for stock or other securities of any entity, the
Company shall be deemed to
7
<PAGE>
have issued a number of shares of its Common Stock for stock or securities
or other property of such entity computed on the basis of the actual
exchange ratio on which the transaction was predicated and for a
consideration equal to the fair market value on the date of such
transaction of all such stock or securities or other property of such
entity, and if any such calculation results in adjustment of the Exercise
Price in accordance with SECTION 6(b), the determination of the number of
shares of Common Stock issuable upon exercise of the Warrants immediately
prior to such merger, consolidation or sale, for purposes of SECTION 6(f),
shall be made after giving effect to such adjustment of the Exercise Price.
(vi) RECORD DATE. In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in Common Stock or in
Convertible Securities, or (B) to rights to subscribe for or to purchase,
or any options for the purchase of, Common Stock or Convertible Securities,
then such record date shall be deemed to be the date of the issue or sale
of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or
the date of the granting of such right, as the case may be.
(vii) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any such shares
shall be considered an issue or sale of Common Stock for the purposes of
this SECTION 6.
(d) ADJUSTMENT FOR CERTAIN SPECIAL DIVIDENDS. In case the Company shall
declare a dividend upon the Common Stock payable otherwise than out of earnings
or earned surplus, determined in accordance with generally accepted accounting
principles, and otherwise than in Common Stock or Convertible Securities (such a
dividend, a "SPECIAL DIVIDEND"), the Exercise Price in effect immediately prior
to the declaration of such a Special Dividend shall be reduced by an amount
equal, in the case of a Special Dividend in cash, to the amount per share of the
Common Stock so declared as payable or, in the case of any other Special
Dividend, to the fair value per share of the Common Stock of the property so
declared as payable, as determined, reasonably and in good faith, by the board
of directors of the Company. For the purposes of determining whether a dividend
is a Special Dividend, a dividend other than in cash shall be considered payable
out of earnings or earned surplus (other than revaluation or paid-in surplus)
only to the extent that such earnings or earned surplus are charged an amount
equal to the fair value of such dividend as determined, reasonably and in good
faith, by the board of directors of the Company. Such reductions shall take
effect as of the date on which a record is taken for the purpose of such
dividend, or, if a record is not taken, the date as of which the holders of
Common Stock of record entitled to such dividend are determined.
(e) SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall at any
time subdivide the outstanding shares of Common Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision shall
be proportionately reduced, and conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased.
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<PAGE>
(f) ADJUSTMENTS FOR CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION.
ETC. In case the Company (i) consolidates with or merges into any other entity
and is not the continuing or surviving corporation of such consolidation or
merger, or (ii) permits any other entity to consolidate with or merge into the
Company and the Company is the continuing or surviving corporation but, in
connection with such consolidation or merger, the Common Stock is changed into
or exchanged for stock or other securities of any other corporation or cash or
any other assets, or (iii) transfers all or substantially all of its properties
and assets to any other entity, or (iv) effects a capital reorganization or
reclassification of the capital stock of the Company in such a way that holders
of Common Stock shall be entitled to receive stock, securities, cash or assets
with respect to or in exchange for Common Stock, then, and in each such case,
proper provision shall be made so that, upon the basis and upon the terms and in
the manner provided in this SUBSECTION (f), the holder of this Warrant
Certificate, upon the exercise of each Warrant at any time after the
consummation of such consolidation, merger, transfer, reorganization or
reclassification, shall be entitled to receive (at the aggregate Exercise Price
in effect for all Warrant Shares issuable upon such exercise immediately prior
to such consummation as adjusted to the time of such transaction), in lieu of
shares of Common Stock issuable upon such exercise prior to such consummation,
the stock and other securities, cash and assets to which such holder would have
been entitled upon such consummation if such holder had so exercised such
Warrant immediately prior thereto (subject to adjustments subsequent to such
corporate action as nearly equivalent as possible to the adjustments provided
for in this SECTION 6).
(g) NOTICE OF ADJUSTMENT. Upon any adjustment of any Exercise Price, then
and in each such case the Company shall promptly deliver a notice to the
registered holder of the Warrants, which notice shall state the Current Value,
if any adjustment depends upon a determination of Current Value, and the
Exercise Price resulting from such adjustment and the increase or decrease, if
any, in the number of shares purchasable at such price upon the exercise of each
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
(h) OTHER NOTICES. In case at any time:
(i) the Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or other
rights;
(ii) the Company shall authorize the distribution to all holders of
its Common Stock of evidence of its indebtedness or assets (other than cash
dividends or cash distributions payable out of earnings or earned surplus
or dividends payable in Common Stock);
(iii) there shall be any capital reorganization, reclassification of
the capital stock of the Company, consolidation or merger of the Company
with another entity (other than a subsidiary of the Company in which the
Company is the surviving or continuing corporation and no change occurs in
the Company's Common Stock), or sale of all or substantially all of its
assets to, another entity;
(iv) there shall be a voluntary or involuntary dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors, or
winding up of the Company; or
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(v) the Company proposes to take any other action or an event occurs
which would require an adjustment of the Exercise Price pursuant to
SUBSECTION (i) of this SECTION 6 then, in any one or more of said cases,
the Company shall give written notice, addressed to the holder of this
Warrant Certificate at the address of such holder as shown on the books of
the Company, of (1) the date on which the books of the Company shall close
or a record shall be taken for such dividend, distribution or subscription
rights, or (2) the date (or, if not then known, a reasonable approximation
thereof by the Company) on which such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, bankruptcy,
assignment for the benefit of creditors, winding-up or other action or
event, as the case may be, shall take place. Such notice shall also specify
(or, if not then known, reasonably approximate) the date as of which the
holders of Common Stock of record shall participate in such dividends,
distribution or subscription rights, or shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors, winding
up, or other action or event, as the case may be. Such written notice shall
be given at least twenty days prior to the action in question and not less
than twenty days prior to the record date or the date on which the
Company's transfer books are closed in respect thereto.
(i) CERTAIN EVENTS. If any event occurs as to which, in the reasonable
opinion of the Company, in good faith, the other provisions of this SECTION 6
are not strictly applicable but the lack of any adjustment would not in the
opinion of the Company fairly protect the purchase rights of the holder of this
Warrant Certificate in accordance with the basic intent and principles of such
provisions, or if strictly applicable would not fairly protect the purchase
rights of the holder of this Warrant Certificate in accordance with the basic
intent and principles of such provisions, then the Company shall appoint a firm
of independent certified public accountants (which may be the regular auditors
of the Company) of recognized national standing, which shall give their opinion
upon the adjustment, if any, on a basis consistent with the basic intent and
principles established in the other provisions of this SECTION 6, necessary to
preserve, without dilution, the exercise rights of the registered holder of this
Warrant Certificate. Upon receipt of such opinion, the Company shall forthwith
make the adjustments described therein.
(j) EXEMPT ISSUANCES. Notwithstanding anything in this Warrant Certificate
to the contrary, no holder of this Warrant Certificate shall be entitled to any
adjustment, and no adjustments shall be made, in respect of the sale or issuance
of Common Stock, Convertible Securities or the granting of any rights to
subscribe for or to purchase Common Stock as follows:
(i) Shares, or options or other rights to acquire Common Stock, issued
to directors, officers, agents or employees of the Company or any of its
incentives or compensation so long as they do not exceed ____ shares in the
aggregate.
(ii) Shares issued to satisfy currently outstanding options or other
rights issued to directors, officers, agents or employees of the Company or
its Affiliates as incentives or compensation;
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(iii) Any shares, options or other rights to acquire Common Stock
issued to any lender and considered for purposes of the Company's financial
statements as part of the interest or cost of funds for amounts borrowed by
the Company or any of its Affiliates from the lender, provided such lender
is not an affiliate of the Company; and
(iv) Shares issued upon conversion or exercise of any warrants or
options issued and outstanding on the date hereof in accordance with their
current terms.
7. REGISTRATION RIGHTS.
(a) The Company agrees that upon written notice given to the Company at any
time on or after the first anniversary of the effective date of the public
offering of the Common Stock but before the fifth anniversary of the effective
date of the public offering, from the holder or holders of not less than
fifty-one percent (51%) of the shares issued and issuable upon exercise of the
Warrants, of a proposed distribution by such holder or holders of Common Stock
issued or issuable upon exercise of Warrants, the Company will, within
forty-five (45) days after receipt of such notice, promptly prepare, file and
diligently prosecute to effectiveness, an appropriate filing with the Commission
of a registration statement covering the proposed sale or distribution of all or
any part of such shares under the Securities Act of 1933, as amended (the
"Act"), and the appropriate registration statements or applications under the
securities laws of such states as such holders, in their discretion, shall
determine, and will use its reasonable best efforts to have such registration
and application (including both the registration under the Act and the
registration or application made under the various state securities laws)
declared effective as soon as practicable after the filing thereof and to remain
effective for such period that may be reasonably necessary to complete the
distribution of securities so registered or qualified. At least fifteen (15)
days prior to such filing, the Company shall give written notice of such
proposed filing to each registered holder of any Warrants at the holders'
addresses appearing on the records of the Company and to each registered holder
of Common Stock purchased from the exercise of any Warrants at such holder's
address appearing on the Company records, and shall offer to include in such
registration statement any proposed distribution of such Common Stock held or to
be held by each such registered holder; provided, however, that except as
provided in Section 7(e), the Company need not effect the registration of the
sale or distribution of Common Stock purchased upon exercise of Warrants more
than once. Except as provided below, all expenses, disbursements and fees
incident to the Company's performance of or compliance with this Section 7
(including fees and expenses of counsel for the Company, special auditing fees
specifically attributable to the sale by the selling holder or holders of Common
Stock, printing expenses (including all necessary copies of the registration
statement and prospectuses contained therein), registration and filing fees and
blue sky fees and expenses, and fees and charges of the Company's transfer agent
and registrar for services rendered in connection therewith) shall be borne by
the Company; provided, however, that the Company shall not be required to pay
for any expenses of any registration proceeding begun (in which case holders
shall bear such expenses), if the registration is withdrawn any time at the
request of the holder or holders of not less than fifty-one percent (51%) of the
shares issued and issuable upon exercise of the Warrants, unless such withdrawal
is due to the misconduct of the Company or due to an unforeseen material adverse
change in the business, properties, prospects or financial condition of the
Company occurring prior to the effectiveness of the registration statement, in
which case the
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Company will continue to bear such expenses. All expenses, disbursement and fees
of the selling holder or holders unrelated to the registration, filing, listing
and compliance with securities and Blue Sky laws and all underwriting discounts
and commissions and transfer taxes shall be borne by the selling holder or
holders on a pro rata basis (unless selling holders agree to an allocation other
than pro rata). Pro rata shall for the purposes of this Section 7 be based upon
the number of shares sold. Notwithstanding the foregoing, the Company shall
reimburse the selling holder or holders the reasonable fees and expenses of one
counsel retained in connection with such registration by the holder or holders.
(b) In connection with any registration under the Act and specified state
securities law pursuant to this Agreement, the Company will, without charge,
furnish each holder whose shares are registered thereunder with copies of the
registration statement and all amendments thereto and will, without charge,
supply each such holder with copies of any preliminary and final prospectus
included therein in such quantities as may be necessary for the purposes of such
proposed sale or distribution that the holder or holders may reasonably request.
(c) In connection with any registration of shares pursuant to this Section
7, the holders whose shares are being registered shall furnish the Company with
such information concerning such holders and the proposed sale or distribution
as shall be required for use in the preparation of such registration statement
and applications.
(d) Notwithstanding the foregoing provisions of this Section 7, upon
receipt of such written notice from the holder or holders of not less than fifty
one percent (51%) of the shares issued and issuable upon exercise of the
Warrants requesting that the Company effect registration of the sale or
distribution of Common Stock as provided in Section 7(a) or upon election by
holders of Warrants or Common Stock to participate in a registration pursuant to
Section 7(e), the Company shall have the option, for a period of ten (10) days
thereafter, to purchase all or any such Warrants and all or any such shares of
Common Stock acquired pursuant to the exercise of the Warrants and held by
holders providing the request for registration under Section 7(a) and/or 7(e)
and held by any other holder of Warrants or shares issued and will exercise its
option if it so elects as follows:
(i) as to such Warrants, at a price per Warrant equal to the
difference between (A) the average of the means between the closing bid and
asked prices of the Common Stock in the over-the-counter market for twenty
(20) consecutive business days commencing thirty (30) business days before
the date of receipt of such notice, (B) if the Common Stock is quoted on
the Nasdaq SmallCap Market, at the average of the means of the daily
closing bid and asked prices of the Common Stock for twenty (20)
consecutive business days commencing thirty (30) business days before the
date of such notice, or (C) if the Common Stock is listed on any national
securities exchange or quoted on the Nasdaq National Market System, at the
average of the daily closing prices of the Common Stock for twenty (20)
consecutive business days commencing thirty (30) business days before the
date of such notice and the Exercise Price of the Warrant at the time of
receipt of such notice; and
(ii) as to shares of Common Stock previously purchased pursuant to the
exercise of Warrants, at a price per share equal to (A) the average of the
means between
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the closing bid and asked prices of the Common Stock in the
over-the-counter market for twenty (20) consecutive business days
commencing thirty (30) business days before the date of such notice, (b) if
the Common Stock is quoted on the Nasdaq SmallCap Market, at the average of
the means of the daily closing bid and asked prices of the Common Stock for
twenty (20) consecutive business days commencing thirty (30) business days
before the date of such notice or (C) if the Common Stock is listed on any
national securities exchange or the Nasdaq National Market System, at the
average of the daily closing prices of the Common Stock for twenty (20)
consecutive business days commencing thirty (30) business days before the
date of such notice (such value of shares so determined in this Section
7(d)(ii), as the case may be, is referred to herein as the "Current
Value").
(iii) If any time on or after the first anniversary of the date hereof
but before the fifth anniversary of the date hereof the Company proposes to
file a registration statement under the Act covering a proposed sale of
shares of Common Stock, it shall give to each holder who then owns any
Warrants or any shares of Common Stock acquired pursuant to the exercise of
the Warrants notice of such proposed registration at least thirty (30) days
prior to the filing of the registration statement and shall afford each
such holder who then proposed to sell or distribute publicly any of the
shares subject to the Warrants upon giving not less than ten (10) days
notice prior to such filing, the opportunity to have such shares included
in the securities registered under the registration statement. Except as
provided below, all expenses, disbursements and fees incident to the
Company's performance of or compliance with this Section 7 (including, but
without limitation, fees and expenses of counsel, auditing fees, printing
expenses, SEC filing fees and expenses, but excluding any underwriting
discounts or commissions) incurred in connection with the registration by
the Company of the sale of any shares for any such holder under this
Section 7(e) shall be borne by the Company. All expenses, disbursement and
fees of the selling holder or holders unrelated to the registration,
filing, listing and compliance with securities and Blue Sky laws and all
underwriting discounts and commissions and transfer taxes shall be borne by
the selling holder or holders on a pro rata basis (unless selling holders
agree to an allocation other than pro rata). Pro rata shall for the
purposes of this Section 7 be based upon the number of shares sold.
Notwithstanding the foregoing, the Company shall reimburse the selling
holder or holders the reasonable fees and expenses of one counsel retained
in connection with such registration by the holder or holders. This Section
7(e) shall not apply to a filing of a registration statement by the Company
on a form that does not permit the inclusion of shares being sold by the
holders, including without limitation, Form S-4 and Form S-8. If the
registration statement covered by this Section 7(e) is for an offering
underwritten in whole or in part, the Company may, as a condition to
inclusion in such offering, require that the above-described shares
requested to be included in the registration statement be included in the
underwriting on the same terms and conditions as securities otherwise being
sold through the underwriters. If in the good faith judgment of the
managing underwriter of any public offering inclusion of all of the
above-described shares covered by a request for registration would reduce
the number of shares to be offered by the Company or interfere with the
successful marketing of the shares offered by the Company, the number of
the above-described shares to be included in the public offering and the
Registration Statement may be reduced pro rata (by a number of shares)
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among the holders requesting inclusion of the registration; provided,
within six (6) months thereafter the Company shall register any such
excluded shares pursuant to Section 7(a) above.
(e) The registration rights stated in Section 7 shall not be applicable to
shares issuable or issued upon the exercise of warrants to a holder if the
holder can sell all of those shares so acquired and at one time under Rule 144
of the Securities and Exchange Commission immediately upon the exercise of the
Warrant or Warrants.
(f) Anything in this Agreement to the contrary notwithstanding, the Company
shall be entitled to postpone for a period of time in its reasonable judgment,
but not to exceed 120 days (a "Blackout Period"), the filing of any registration
statement, and the preparation and/or filing of any prospectus or any amendments
or supplements to any registration statement or prospectus, if the Company
reasonably determines that any such filing or the offering of any shares would
(i) impede, delay or otherwise interfere with any financing, offer or sale of
securities, acquisition, corporate reorganization or other significant
transaction involving the Company or any of its subsidiaries, or (ii) require
disclosure of material information which, if disclosed at that time, would be
harmful to the interests of the Company and its shareholders; provided, however,
that, in the case of a Blackout Period pursuant to (ii) above, the blackout
period shall earlier terminate upon public disclosure by the Company or public
admissions by the Company of such material information. Upon notice by the
Company to the holders of such determination, each of the fact of any such
notice strictly confidential, (ii) promptly halt any offer, sale, trading or
transfer by of any of the shares for the duration of the Blackout period set
forth in such notice (or until earlier terminated in writing by the Company) and
(iii) promptly halt any use, publication, dissemination or distribution of any
registration statement with respect to any shares and any prospectus included
therein for the duration of the Blackout Period set forth in such notice (or
until earlier terminated in writing by the Company).
8. INDEMNIFICATION; CONTRIBUTION.
(a) The Company will indemnify and hold harmless each holder and each
affiliate thereof of Common Stock registered pursuant to this Agreement with the
Commission, or under any Blue Sky Law or regulation against any losses, claims,
damages, or liabilities, joint or several, to which such holder may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, registration statement, prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse each
such holder and affiliate for any legal or other expenses reasonably incurred by
such holder in connection with investigating or defending any such action or
claim regardless of the negligence of any such holder or affiliate; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
made in any preliminary prospectus, registration statement or prospectus, or any
such amendment or supplement thereto, in reliance upon and in conformity with
written information furnished to the Company by any such holder expressly for
use therein.
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(b) Each holder of Common Stock registered pursuant to this Agreement will
indemnify and hold harmless the Company against any losses, claims, damages or
liabilities to which the Company may become subject, under the Act or otherwise,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus,
registration statement or prospectus, or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in any preliminary prospectus, registration statement
or prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with written information furnished to the Company by such holder
expressly for use therein.
(c) Promptly after receipt by an indemnified party under Sections 8(a) or
(b) above of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party under
either such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability that it may otherwise have to any indemnified
party. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof the
indemnifying party shall be entitled to assume the defense thereof by notice in
writing to the indemnified party. After notice from the indemnifying party to
such indemnified party of its election to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under either of
such subsections for any legal expenses of other counsel or any other expense,
in each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation incurred prior
to the assumption by the indemnifying party, unless such expenses have been
specifically authorized in writing by the indemnifying party, the indemnifying
party has failed to assume the defense and employ counsel, or the named parties
to any such action include both the indemnified party and the indemnifying
party, as appropriate, and such indemnified party has been advised by counsel
that the representation of such indemnified party and the indemnifying party by
the same counsel would be inappropriate due to actual or potential differing
interests between them, in each of which cases the fees of one counsel (together
with appropriate local counsel) for the indemnified party will be paid by the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of the settlement; provided, however, that
such consent or approval shall not unreasonably be withheld.
(d) If the indemnification provided for in this Section 8 is unavailable or
insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) in
respect of any losses, claims, damages or liabilities (or action in respect
thereof) referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the holder or holders from this Agreement and from the offering of
the shares of Common Stock. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits
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but also the relative fault of the Company and the holders in connection with
the statement or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the holder and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the holders agree that it
would not be just and equitable if contribution pursuant to this Section 8(d)
were determined by pro rata allocation (even if the holders were treated as one
entity for such purpose) or by any other method of allocation that does not take
into account the equitable considerations referred to above in this subsection
(e). Except as provided in Section 8(c), the amount paid or payable by an
indemnified party as a result of the losses, claims, damages, or liabilities (or
actions in respect thereof) referred to above in this Section 8(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigation or defending any such action
or claim. 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. Notwithstanding any
provision in this Section 8(d) to the contrary, no holder shall be liable for
any amount, in the aggregate, in excess of the net proceeds to such holder from
the sale of such holder's shares (obtained upon exercise of Warrants) giving
rise to such losses, claims, damages or liabilities.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability that the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any holder of Warrants within the meaning of the Act. The
obligations of the holders of Common Stock under this Section 8 shall be in
addition to any liability that such holders may otherwise have and shall
extend, upon the same terms and conditions to each person, if any, who
controls the Company within the meaning of the Act.
9. STOCK EXCHANGE LISTING. In the event the Company lists its Common Stock
on any national securities exchange, the Company will, at its expense, also list
on such exchange, upon exercise of a Warrant, all shares of Common Stock
issuable pursuant to such Warrant.
10. SPECIFIC PERFORMANCE. The Company stipulates that remedies at law, in
money damages, available to the holder of a Warrant, or of a holder of Common
Stock issued pursuant to exercise of a Warrant, in the event of any default or
threatened default by the Company in the performance of or compliance with any
of the terms of this Agreement are not and will not be adequate. Therefore, the
Company agrees that the terms of this Agreement may be specifically enforced by
a decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
11. SUCCESSORS AND ASSIGNS; BINDING EFFECT. This Agreement shall be binding
upon and inure to the benefit of you and the Company and their respective
successors and permitted assigns.
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12. NOTICES. Any notice hereunder shall be given by registered or certified
mail, if to the Company, at its principal office referred to in Section 5 and,
if to the holders, to their respective addresses shown in the Warrant ledger of
the Company, provided that any holder may at any time on three (3) days' written
notice to the Company designate or substitute another address where notice is to
be given and the Company may at any time on three (3) days' written notice to
the holders of the Warrants or shares issued upon exercise of the Warrants
designate or substitute another address where notice is to be given.. Notice
shall be deemed given and received after a certified or registered letter,
properly addressed with postage prepaid, is deposited in the U.S. mail.
13. SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the remainder of this
Agreement.
14. ASSIGNMENT; REPLACEMENT OF WARRANTS. If the Warrant or Warrants are
assigned, in whole or in part, the Warrants shall be surrendered at the
principal office of the Company, and thereupon, in the case of a partial
assignment, a new Warrant shall be issued to the holder thereof covering the
number of shares not assigned, and the assignee shall be entitled to receive a
new Warrant covering the number of shares so assigned. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant and appropriate bond or indemnification protection,
the Company shall issue a new Warrant of like tenor. Except as contemplated by
Section 7 of this Agreement, the Warrants will not be transferred, sold or
otherwise hypothecated by you or any other person and the Warrants will be
nontransferable, except to (i) one or more persons, each of which on the date of
transfer is an officer or partner of you; (ii) a partnership or partnerships,
the partners of which are you and one or more persons, each of whom on the date
of transfer is an officer to you; (iii) a successor to you in merger or
consolidation; (iv) a purchaser of all or substantially all of your assets; or
(v) a person that receives a Warrant upon death of a Holder pursuant to will,
trust, or the laws of intestate succession.
15. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Oklahoma without giving effect to the
principles of choice of laws thereof.
16. DEFINITION. All references to the word "you," and to "Kashner Davidson
Securities Corporation." in this Agreement shall be deemed to apply with equal
effect to any persons or entities to whom Warrants have been transferred in
accordance with the terms hereof, and, where appropriate, to any persons or
entities holding shares of Common Stock issuable upon exercise of Warrants.
17. HEADINGS. The headings herein are for purposes of reference only and
shall not limit or otherwise affect the meaning of any of the provisions hereof.
Very truly yours,
TRAINING DEVICES INTERNATIONAL, INC.
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By:
----------------------------------
Bruce S. Betschart, President
Accepted as of May _____, 2000.
KASHNER DAVIDSON SECURITIES CORPORATION
BY:
- ----------------------------------
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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 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.
No. ______ _______ Warrants
TRAINING DEVICES INCORPORATED
COMMON STOCK PURCHASE WARRANT
THIS IS TO CERTIFY thatKashner Davidson Securities Corporation or its assigns as
permitted in that certain Warrant Agreement (the "Warrant Agreement") dated
_____________ __, 2000, by and among the Company (as hereinafter defined) and
Kashner Davidson Securities Corporation is entitled to purchase at any time or
from time to time on or after the first anniversary of the effective date of the
Company's initial public offering (the "Effective Date") until 5:00 p.m.,
Sarasota, Florida time on the fifth anniversary of the Effective Date, an
aggregate of 120,000 shares of Common Stock without par value of Training
Devices International, Inc., a Colorado corporation (the "Company"), for an
exercise price per share as set forth in the Warrant Agreement referred to
herein. This Warrant is issued pursuant to the Warrant Agreement, and all rights
of the holder of this Warrant are further governed by, and subject to the terms
and provisions of such Warrant Agreement, copies of which are available upon
request to the Company. The holder of this Warrant and the shares issuable upon
the exercise hereof shall be entitled to the benefits, rights and privileges and
subject to the obligations, duties and liabilities provided in the Warrant
Agreement.
The issuance of this Warrant and the shares issuable upon the due and timely
exercise hereof have not been registered under the Securities Act of 1933, as
amended (the "Act"), or any similar state securities law or act, and, as such,
no public offering of either this Warrant of any of the shares of Common Stock
issuable upon exercise of this Warrant may be made other than under an exemption
under the Act or until the effectiveness of a registration statement under such
Act covering such offering. Transfer of this Warrant is restricted as provided
in Section 14 of the Warrant Agreement.
Subject to the provisions of the Act, of the Warrant Agreement and of this
Warrant, this Warrant and all rights hereunder are transferable, in whole or in
part, only to the extent expressly permitted in such documents and then only at
the principal office of the Company, Attention: President, by the holder hereof
or by a duly authorized attorney-in-fact, upon surrender of this Warrant duly
endorsed, together with the Assignment hereof duly endorsed. Until transfer
hereof on the books of the Company, the Company may treat the registered holder
as the owner hereof for all purposes.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and its
corporate seal to be hereunto affixed by its proper corporate officers thereunto
duly authorized.
TRAINING DEVICES INTERNATIONAL, INC.
By:
----------------------------------
Bruce S. Betschart, President
19
<PAGE>
[NOT TO BE COMPLETED PRIOR TO EXERCISE OF WARRANTS]
NOTICE OF EXERCISE OF WARRANTS
To: Training Devices International, Inc.
7367 S. Revere Parkway, Bldg. #2C
Englewood, Colorado 80112-3931
The undersigned hereby irrevocably elects to exercise ______ warrants
represented and evidenced by the within Certificate of Warrants for, and to
purchase thereunder ______ shares of Common Stock of Training Devices
International, Inc. provided for therein, and hereby delivers herewith
either: a certified check bank cashier's check, or wire transfer to a bank
specified by the Company, payable in United States Dollars to Training
Devices Incorporated in the aggregate amount of $______, which represents the
purchase price of such shares.
The undersigned hereby certifies that it qualifies as an "accredited
investor" as that term is defined under Regulation D of the Securities Act of
1933, as amended, and any applicable successor regulation or rule. The
undersigned to provide any supporting documentation to substantiate this status
as Training Devices Incorporated may reasonably request.
The undersigned further certifies that it is resident of the State of
_____________________ and that such State [ ] was [ ] was not (check one) the
state of the undersigned's residence at the time of the issuance of the
Warrants. (If "was not" in the foregoing statement was checked, the undersigned
shall deliver evidence of the compliance with the current resident state's "blue
sky" or state securities laws.)
If said number of shares shall not be all the shares purchasable
thereunder, please issue a new Certificate for the balance remaining of the
Warrants exercisable under the within Certificate registered in the name of the
undersigned holder of the within Certificate as indicated below, and deliver to
the address set forth below.
Dated:
------------------------
Name of Holder:
------------------------
Address:
-------------------------------
Signature:
--------------------------
Note: The above signature must correspond with the name as written upon the
face of the within Certificate in every particular, without alteration
or any change whatsoever.
20
<PAGE>
Exhibit 4.3
ADVISORY AND INVESMENT BANKING AGREEMENT
This Agreement is made and entered into as of the [__]th day of [_____],
2000 by and between Kashner Davidson Securities Corporation, a Florida
corporation ("Kashner") and Training Devices International, Inc., a Colorado
corporation (the "Company").
In consideration of the mutual promises made herein and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. PURPOSE: The Company hereby engages Kashner for the term specified in
Paragraph 2 hereof to render consulting advice to the Company as an investment
banker relating to financial and similar matters upon the terms and conditions
set forth herein.
2. TERM: Except as otherwise specified in paragraph 4 hereof, this
Agreement shall be effective from [THE EFFECTIVE DATE] to [24 months later].
3. DUTIES OF KASHNER: During the term of this Agreement,
Kashner shall seek out Transactions (as hereinafter defined) on behalf of the
Company and shall furnish advice to the Company in connection with any such
Transactions.
4. COMPENSATION: In consideration for the services rendered by Kashner to
the Company pursuant to this Agreement (and in addition to the expenses provided
for in Paragraph 5 hereof), the Company shall compensate Kashner as follows:
(a) The Company shall pay Kashner a fee of $4,000 per month during the
term of this Agreement. The sum of $96,000 shall be payable in full on the date
of this Agreement. In the event that Kashner ceases its business operations as a
financial advisor and investment banker, materially breaches or is unable to
satisfy its performance obligations hereunder, then Kashner shall repay to the
Company the pro rata unearned portion of foregoing fee, based on the number of
months for which performance was delivered and the remaining number of months in
the term.
(b) In the event that any Transaction (as hereinafter defined) occurs
during the term of this Agreement or one year thereafter, the Company shall pay
fees to Kashner as follows:
(i) five percent (5%) of any consideration up to and including $1,000,000
paid pursuant to the Transaction, plus
(ii) four percent (0) of any consideration from $1,000,001 up to and
including $2,000,000 paid pursuant to the Transaction, plus
(iii) three percent (3%) of any consideration from $2,000,001 up to and
including $3,000,000 paid pursuant to the Transaction, plus
(iv) two percent (2%) of any consideration from $3,000,001 up to and
including $4,000,000 paid pursuant to the Transaction, plus
1
<PAGE>
(v) one percent (1%) of any consideration greater than $4,000,000 paid
pursuant to the Transaction.
For the purposes of this Agreement, "Consideration" shall mean the
total market value on the day of the closing of stock, cash, assets and all
other property (real or personal) exchanged or received, directly or indirectly
by the Company or any of its security holders in connection with any
Transaction. Any co-broker or brokers retained by Kashner shall be paid by
Kashner.
For the purposes of the Agreement, a "Transaction" shall mean (a) any
transaction originated by Kashner, whereby, directly or indirectly, control of
or a material interest in the Company or any of its businesses or any of their
respective assets, is transferred for Consideration, or (b) any transaction
originated by Kashner whereby the Company acquires any other company or the
assets of any other company or an interest in any other company (an
"Acquisition") or to so act.
In the event Kashner originates a line of credit with a lender, the
Company and Kashner will mutually agree on a satisfactory fee for such services
provided based upon reasonable and customary practice in the industry and the
terms of payment of such fee; provided, however, that in the event the Company
is introduced to a corporate partner by Kashner in connection with a merger,
Acquisition or financing and a credit line develops directly as a result of the
introduction, the appropriate fee shall be the amount set forth in the schedule
above with consideration to be based upon the amount of the line of credit. In
the event Kashner introduces the Company to a joint venture partner or customer
and sales develop as a result of the introduction, the Company agrees to pay a
fee of five percent (5%) of total sales generated directly from this
introduction during the first two years following the date of the first sale, in
lieu of the fees set forth in the schedule above. Total sales shall mean cash
receipts less any applicable refunds, returns, allowances, credits and shipping
charges and monies paid by the Company by way of settlement or judgment arising
out of claims made by or threatened against the Company. Commission payments
shall be paid on the 15th day of each month following the receipt of customers'
payment. In the event any adjustments are made to the total sales after the
commission has been paid, the Company shall be entitled to an appropriate refund
or credit against future payments under this Agreement. All fees to be paid
pursuant to this Agreement, except as otherwise specified, are due and payable
to Kashner in cash at the closing or closings of any transaction specified in
Paragraph 4 hereof. In the event that this Agreement shall not be renewed or if
terminated for any reason, notwithstanding any such non-renewal or termination,
Kashner shall be entitled to a full fee as provided under Paragraphs 4 and 5
hereof, for any transaction for which the discussions were initiated during the
term of this Agreement and which is consummated within a period of twelve months
after non-renewal or termination of this Agreement.
5. EXPENSES OF KASHNER: In addition to the fees payable hereunder, and
regardless of whether any transaction set forth in Paragraph 4 hereof is
proposed or consummated the Company shall reimburse Kashner for all fees and
disbursements of Kashner's counsel and Kashner's travel and reasonable
out-of-pocket expenses incurred in connection with and in direct furtherance of
the services performed by Kashner pursuant to this Agreement, including without
limitation, hotels, food and associated expenses and long-distance telephone
2
<PAGE>
calls. Kashner shall obtain the consent of the Company before incurring any
expense over $1,000.
6. LIABILITY OF KASHNER:
(a) The Company acknowledges that all opinions and advice (written or
oral) given by Kashner to the Company in connection with Kashner's engagement
are intended solely for the benefit and use of the Company in considering the
transaction to which they relate, and the Company agrees that no person or
entity other than the Company shall be entitled to make use of or rely upon the
advice of Kashner to be given hereunder, and no such opinion or advice shall be
used for any other purpose or reproduced, disseminated, quoted or referred to at
any time, in any manner or for any purpose, nor may the Company make any public
references to Kashner, or use Kashner's name in any annual reports or any other
reports or releases of the Company without Kashner's prior written consent.
(b) The Company acknowledges that Kashner makes no commitment
whatsoever as to making a market in the Company's securities or to recommending
or advising its clients to purchase the Company's securities, except that
Kashner has committed to make a market in the Company's securities for at least
45 days after the effective date of the Company's initial public offering.
Research reports or corporate finance reports that may be prepared by Kashner
will, when and if prepared, be done solely on the merits or judgment of analysis
of Kashner or any senior corporate finance personnel of Kashner.
7. KASHNER'S SERVICES TO OTHERS: The Company acknowledges that Kashner or
its affiliates are in the business of providing financial services and
consulting advice to others. Nothing herein contained shall be construed to
limit or restrict Kashner in conducting such business with respect to others, or
in rendering such advice to others.
8. COMPANY INFORMATION:
(a) The Company recognizes and confirms that, in advising the Company
and in fulfilling its engagement hereunder, Kashner will use and rely on data,
material and other information furnished to Kashner by the Company. The Company
acknowledges and agrees that in performing its services under this engagement,
Kashner may rely upon the data, material and other information supplied by the
Company without independently verifying the accuracy, completeness or veracity
of same.
(b) Except as contemplated by the terms hereof or as required by
applicable law, Kashner shall keep confidential all material non-public
information provided to it by the Company, and shall not disclose such
information to any third party, other than such of its employees and advisors as
Kashner determines to have a need to know. Upon termination of this Agreement,
at the request of the Company, Kashner shall deliver to the Company all
non-public material in its possession relating to the business affairs of the
Company.
9. INDEMNIFICATION:
(a) The Company shall indemnify and hold Kashner and its directors,
officers, employees and agents harmless against any and all liabilities, claims,
lawsuits, including
3
<PAGE>
any and all awards and/or judgments to which it may become subject under the
Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act
of 1934, as amended (the "Act") or any other federal or state statute, at common
law or otherwise, insofar as said liabilities, claims and lawsuits (including
awards and/or judgments) arise out of or are in connection with the services
rendered by Kashner or any transactions in connection with this Agreement,
except for any liabilities, claims and lawsuits (including awards judgments and
related costs and expenses), arising out of acts or omissions of Kashner. In
addition, the Company shall also indemnify and hold Kashner harmless against any
and all reasonable costs and expenses, including reasonable counsel fees,
incurred or relating to the foregoing. If it is finally judicially determined
that the Company will not be responsible for any liabilities, claims and
lawsuits or expenses related thereto, the indemnified party, by his or its
acceptance of such amounts, agrees to repay the Company all amounts previously
paid by the Company to the indemnified person and will pay all costs of
collection thereof, including but not limited to reasonable attorneys' fees
related thereto.
Kashner shall give the Company prompt notice of any such liability,
claim or lawsuit which Kashner contends is the subject matter of the Company's
indemnification and the Company thereupon shall be granted the right to take any
and all necessary and proper action, at its sole cost and expense, with respect
to such liability, claim and lawsuit, including the right to settle, compromise
and dispose of such liability, claim or lawsuit, excepting therefrom any and all
proceedings or hearings before any regulatory bodies and/or authorities.
Kashner shall indemnify and hold the Company and its directors,
officers, employees and agents harmless against any and all liabilities, claims
and lawsuits, including any and all awards and/or judgments to which it may
become subject under the 1933 Act, the Act or any other federal or state
statute, at common law or otherwise, insofar as said liabilities, claims and
lawsuits (including awards and/or judgments) arise out of or are based upon
Kashner's gross negligence, useful misconduct, bad faith or any untrue statement
or alleged untrue statement of a material fact or omission at a material fact
required to be stated or necessary to make the statement provided by Kashner,
not misleading, which statement or omission was made in reliance upon
information furnished in writing to the Company by or on behalf of Kashner for
inclusion in any registration statement or prospectus or any amendment or
supplement thereto in connection with any transaction to which this Agreement
applies. In addition, Kashner shall also indemnify and hold the Company harmless
against any and all costs and expenses, including reasonable counsel fees,
incurred or relating to the foregoing.
The Company shall give to Kashner prompt notice of any such liability,
claim or lawsuit which the Company contends is the subject matter of Kashner's
indemnification and Kashner thereupon shall be granted the right to a take any
and all necessary and proper action, at its sole cost and expense, with respect
to such liability, claim and lawsuit, including the right to settle, compromise
or dispose of such liability, claim or lawsuit, excepting therefrom any and all
proceedings or hearings before any regulatory bodies and/or authorities.
(b) In order to provide for just and equitable contribution under the
Act in any case in which (i) any person entitled to indemnification under this
Section 9 makes claim for indemnification pursuant hereto 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
4
<PAGE>
the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 10 provides for
indemnification in such case, or (ii) contribution under the Act may be required
on the part of any such person in circumstances for which indemnification is
provided under this Section 10, then, and in each such case, the Company and
Kashner shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after any contribution from others) in such
proportion taking into consideration the relative benefits received by each
party from the offering covered by the prospectus with respect to any
transactions in connection with this Agreement (taking into account the portion
of the proceeds of the offering realized by each), the parties' relative
knowledge and access to information concerning the matter with respect to which
the claim was assessed, the opportunity to correct and prevent any statement or
omission and other equitable considerations appropriate under the circumstances;
provided, however, that notwithstanding the above in no event shall Kashner be
required to contribute any amount in excess of 10% of the public offering price
of any securities to which such Prospectus applies; and provided, that, in any
such case, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11 (f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
Within fifteen (15) days after receipt by any party to this Agreement
(or its representative) of notice of the commencement of any action, suit or
proceeding, such party will, if a claim for contribution in respect thereof is
to be made against another party (the "Contributing Party"), notify the
Contributing Party of the commencement thereof, but the omission so to notify
the Contributing Party will not relieve it from any liability which it may have
to any other party other than for contribution hereunder. In case any such
action, suit or proceeding is brought against any party, and such party notifies
a Contributing Party or his or its representative of the commencement thereof
within the aforesaid fifteen (15) days, the Contributing Party will be entitled
to participate therein with the notifying party and any other Contributing Party
similarly notified. Any such Contributing Party shall not be liable to any party
seeking contribution on account of any settlement of any claim, action or
proceeding effected by such party seeking contribution without the written
consent of the Contributing Party. The indemnification provisions contained in
this Section 10 are in addition to any other rights or remedies which either
party hereto may have with respect to the other or hereunder.
10. KASHNER AS INDEPENDENT CONTRACTOR : Kashner shall perform its services
hereunder as independent contractors and not as employees of the Company or an
affiliate thereof. It is expressly understood and agreed to by the parties
hereto that Kashner shall have no authority to act for, represent or bind the
Company or any affiliate thereof in any manner, except as may be agreed to
expressly by the Company in writing from time to time.
11. MISCELLANEOUS:
(a) This Agreement between the Company and Kashner constitutes the
entire agreement and understanding of the parties hereto, and supersedes any and
all previous agreements and understandings, whether oral or written, between the
parties with respect to the matters set forth herein.
5
<PAGE>
(b) Any notice or communication permitted or required hereunder shall
be in writing and shall be deemed sufficiently given if hand-delivered or sent
(i) postage prepaid by registered mail, return receipt requested, or (ii) by
facsimile, to the respective parties as set forth below, or to such other
address as either party may notify the other in writing:
If to the Company, to: Training De vices International, Inc.
367 S, Revere Parkway, Bldg. #2C
Englewood, Colorado 80112-3931
If to Kashner, to: Kashner Davidson Securities Corporation
77 South Palm Avenue
Sarasota, Florida 34236
Attn: Mathew Meister
(c) This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and their respective successors, legal
representatives and assigns.
(d) This Agreement may be executed in any number of counterparts, each
of which together shall constitute one and the same original document.
(e) No provision of this Agreement may be amended, modified or waived,
except in a writing signed by all of the parties hereto.
(f) This Agreement K all be construed in accordance with and governed
by the laws of the State of Colorado, without giving effect to conflict of law
principles. The parties hereby agree that any dispute which may arise between
them arising out of or in connection with this Agreement shall be adjudicated
before a court located in [ ], and they hereby submit to the exclusive
jurisdiction of the courts of the State of Florida located in [ ] and of the
federal courts in the [ ] District of [ ] with respect to any action or legal
proceeding commenced by any party, and irrevocably waive any objection they now
or hereafter may have respecting the venue of any such action or proceeding
brought in such a court or respecting the fact that such court is an
inconvenient forum, relating to or arising out of this Agreement, and consent to
the service of process in any such action or legal proceeding by means of
registered or certified mail, return receipt requested, in care of the address
set forth in Paragraph 11 (b) hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
KASHNER DAVIDSON SECURITIES CORPORATION
By:
------------------------------------
TRAINING DEVICES INTERNATIONAL, INC.
By:
------------------------------------
6
<PAGE>
AMENDMENT NO. 1 TO
SECURITY AGREEMENT
This Amendment No. 1 is made as of September 30, 1999, between Aims
Community College Foundation and Training Devices International, Inc. (also
known as Training Devices, Inc.).
The parties have previously entered into a Security Agreement dated
September 14, 1999 relating to a promissory note in the amount of $2,020,000
dated September 14, 1999.
In consideration of the mutual promises and covenants dated in this
Amendment, the parties agree as follows:
1. Under the heading "Ownership and Duties Toward Property," the
fifth paragraph is hereby deleted. The deleted paragraph reads: You may
demand immediate payment of the debt(s) if the debtor is not a natural person
and without your prior written consent (1) a beneficial interest in the
debtor is sold or transferred or (2) there is a change in either the identity
or number of members of a partnership or (3) there is a change in ownership
of more than 25 percent of the voting stock of a corporation.
2. In all other respects the Security Agreement remains unchanged
and in full force and effect.
This Amendment is executed as of September 30, 1999.
AIMS COMMUNITY COLLEGE TRAINING DEVICES INTERNATIONAL,
FOUNDATION INC. also known as Training Devices, Inc.
By: By:
-------------------------- --------------------------
Name: Ron Ellington, CEO
------------------------
Title:
-----------------------
<PAGE>
The following undersigned has read and consents to the foregoing
Amendment No. 1 to Security Agreement, which Security Agreement has
previously been assigned to the undersigned by AIMS Community College
Foundation.
1ST CHOICE BANK
By:
---------------------------
Its:
--------------------------
<PAGE>
AGREEMENT TO CONVERT NOTES
This Agreement is entered into as of the ___day of March 2000, by
and between Training Devices International Inc., a Colorado corporation
("TDI"), and the noteholder whose name appears at the bottom of this
Agreement ("Noteholder").
WHEREAS, TDI issued Noteholder its promissory note (the "Note")
dated the date set forth at the bottom of this Agreement; and
WHEREAS, TDI is preparing to file an amendment to its Registration
Statement (the "Registration Statement") for its Initial Public Offering
("IPO"); and
WHEREAS, the total being raised in the IPO is less than TDI had
originally contemplated; and
WHEREAS, in order to increase the proceeds from the IPO that TDI
will be able to use for its business, TDI would like the Noteholder to forego
repayment of the Note from the IPO proceeds and convert the Note to common
stock.
NOW THEREFORE, in consideration of the mutual promises contained
herein, and other good and valuable consideration, TDI and Noteholder agree
as follows:
1. Upon the closing of the IPO of TDI, the Note shall automatically
convert to shares of TDI's common stock. The number of shares to be received
upon conversion of the Note shall equal the principal and accrued interest on
the Note divided by a number that will be equal to 50% of the IPO price to
investors, before underwriters' discounts. The shares received upon this
conversion of the Note are called "Conversion Shares."
2. TDI shall promptly notify Noteholder of the closing of the IPO.
Noteholder shall deliver the Note to TDI or its transfer agent, and promptly
after such delivery, TDI shall issue the Conversion Shares. The Conversion
Shares will contain a restrictive legend, indicating that the shares have not
been registered with the SEC and can be resold only pursuant to an exemption
from registration or a registration statement under applicable securities
laws. Noteholder is aware that the holding period for the Conversion Shares
shall commence on the Effective Date of the Registration Statement, for the
purposes of SEC Rule 144.
3. Noteholder agrees that upon conversion of the Note Noteholder
will waive the provisions of paragraph 4 of the Note that provides for
additional cash payments over a five-year period.
4. If the IPO does not close for any reason, the Note shall remain
outstanding under its original terms.
NOTEHOLDER TRAINING DEVICES
INTERNATIONAL INC.
By:
- ----------------------------- -----------------------------
< < Name > > Its:
----------------------------
<PAGE>
NOTE PRINCIPAL: < < $ Amt > >
DATE OF NOTE: < < Date of Note > >
<PAGE>
STRATEGIC ALLIANCE AGREEMENT
This Strategic Alliance Agreement is entered into as of January 31, 2000,
between Training Devices International, Inc. ("Company") and Babcock & Brown LP
("B&B").
BACKGROUND
The Company desires to engage B&B's services in contacting and setting up
meetings with potential purchasers of fractional ownership interests in flight
simulators or hours for use in the flight simulators manufactured by the
Company.
AGREEMENT
The parties agree as follows:
1. DUTIES OF B&B.
a. DUTIES. The duties of B&B under this Agreement are to use
its commercially reasonable efforts to (i) identify and
contact potential purchasers of fractional ownership
interests in flight simulators manufactured by the Company,
and/or parties interested in contracting for hours for use
in the flight simulators manufactured by the Company,
including, at a minimum, the potential purchasers listed on
SCHEDULE I, (ii) provide the Company with publicly
available information about the potential purchasers and
the target markets, (iii) arrange meetings between the
Company and senior executives of potential purchasers in
accordance, to the extent possible, with the time table set
forth on SCHEDULE I (the Company understands that B&B is
not guaranteeing meetings with all of the potential
purchasers listed on SCHEDULE I or the results of any of
those meetings), and (iv) have a representative of B&B
attend the initial meeting with any potential purchasers as
to which B&B has arranged a meeting and also attend, if
requested by the Company at reasonable places and times,
additional meetings with any such potential purchaser. B&B
potential purchasers shall include all parties listed on
Schedule I plus any parties added to Schedule I by mutual
agreement, including but not limited to parties who are
suggested as a result of meetings or contracts arranged by
B&B; provided that for any such party on Schedule I to be a
B&B potential purchaser, B&B shall have arranged a meeting
of the party with the Company or shall have made another
form of introduction of the party to the Company. B&B shall
neither contact any potential purchaser not listed on
Schedule I nor arrange any meeting with any such potential
purchaser for the purpose of discussing the Company or its
flight simulators without the prior
1
<PAGE>
written consent and approval of the Company. The term "B&B
potential purchaser" means a potential purchaser described
above as to which the Company has provided its prior
written consent and approval and with which B&B has
arranged a meeting of the Company or has made another form
of introduction of the Company. B&B shall maintain an
updated Schedule I of B&B potential purchasers.
b. INDIVIDUALS. The services to be performed by B&B as
described in paragraph 1(a) shall be directed and led by
Robert Falkenberg. At least one of Mr. Falkenberg, Anthony
Mosse or Paul Marini shall be present at each meeting
described in paragraph 1(a) arranged by B&B between the
Company and potential purchasers. Any of the above three
persons are authorized by the Company to contact potential
purchasers, subject to the Company's prior written approval
and consent.
2. COMPENSATION. As compensation for the services rendered hereunder,
the Company agrees to compensate B&B as follows:
a. BASE COMPENSATION. B&B shall be entitled to receive as
compensation for the duties listed in paragraph 1 above
("Base Compensation"), warrants to purchase up to 150,000
shares of the Company's common stock, at an exercise price
of $5.00 per share. Each warrant shall contain the terms
and provisions as set forth in the form of warrant attached
hereto as SCHEDULE III. The expiration date for each such
warrant in the Base Compensation shall be December 31,
2005.
Warrants for 75,000 shares issued on February 29,
2000
Warrants for 50,000 shares issued on March 31, 2000
Warrants for 25,000 shares issued on April 30, 2000
All warrants shall vest immediately following issuance.
b. INCENTIVE COMPENSATION.
i. BASIS. In addition to the Base Compensation, B&B
shall also be entitled to receive incentive
compensation ("Incentive Compensation") based upon
the number of flight simulators in which all or any
part of fractional ownership interests are sold to,
or the full amount of or any part of simulator hours
in each simulator are contracted for by, B&B
potential purchasers. For purposes of determining
Incentive Compensation, each flight simulator in the
table below shall consist of six fractional
ownership interests (1,000 hours per year for each
fractional ownership interest) or 6,000 simulator
2
<PAGE>
hours for five years for a total of 30,000 hours
(6,000 x 5) in any simulators of the Company. For
each simulator in which any fractional ownership
interests are sold to, or hours of simulator hours
are contracted for by, B&B potential purchasers
within the time period described below, B&B shall
receive warrants to purchase the following
additional shares of the Company's common stock:
<TABLE>
<CAPTION>
Six Fractional Ownership Warrants to Maximum
Interests, or 6,000 Hours, in: Purchase: Exercise Price:
------------------------------ --------- ---------------
<S> <C> <C>
1st simulator 200,000 shares $5.00
2nd simulator 150,000 shares $6.00
3rd simulator 75,000 shares $8.00
4th simulator 50,000 shares $10.00
</TABLE>
The total number of shares for which B&B may receive
warrants as Incentive Compensation shall not exceed
475,000 in the aggregate. Each warrant issued as
Incentive Compensation shall contain the terms and
provisions as set forth in the form attached as
SCHEDULE III and will be vested fully on the date of
issuance as to all shares subject to the warrant.
The expiration date of each warrant issued as
Incentive Compensation shall be five years after the
date of its issuance. Each warrant that is Incentive
Compensation regarding a simulator shall be issued
within 30 days after a binding contract has been
executed for any fractional ownership interests or
hours in the simulator from B&B potential
purchasers, and shares subject to the warrant shall
be as described below. Upon each sale of six
fractional ownership interests or 6,000 hours for
five years in regard to any simulators, warrants as
Incentive Compensation for one simulator will have
been issued by TDI to B&B. When a B&B potential
purchaser purchases any fractional ownership
interests in a simulator or contracts for any hours
in a simulator, then the number of shares subject to
the warrant issued as Incentive Compensation shall
be equal to the following:
(A) The number of shares that would be issued for
six fractional ownership interests or 6,000
hours for five years (30,000 hours), as the
case may be, for the simulator in question,
multiplied by
(B) a fraction of which (I) the numerator is the
number of fractional ownership interests
purchased by the B&B potential purchaser or
the total number of hours contracted by the
B&B potential purchaser
3
<PAGE>
(multiplying the hours per year times the
number of years), and (II) the denominator is
six fractional ownership interests or 30,000
hours, as the case may be.
As an example, if two B&B potential purchasers
purchase at the same time a total of 2.5 fractional
ownership interests in a simulator and B&B potential
purchasers have previously purchased a total of six
fractional ownership interests or 30,000 total hours
in one or more simulators, then the Company will
issue for a "second simulator" to B&B a warrant for
the purchase of the following number of shares:
150,000 shares (for the second simulator) x (2.5 divided by
6) = 62,500 shares.
As a second example, if one B&B potential purchaser
contracts for the use of a simulator for 1,000 hours
for three years and another B&B potential purchaser
contracts for 1,000 hours for five years in a
simulator and if B&B potential purchasers have
previously purchased a total of 12 fractional
ownership interests or a total of 60,000 hours
(calculated on the basis of hours per year times the
number of years), then the Company will issue for a
"third simulator" to B&B a warrant for the purchase
of the following number of shares:
75,000 shares (for the third simulator) x [(1,000 x 3)
+(1,000 x 5)] = 30,000
8,000 =
------
30,000
20,000 shares
The parties acknowledge that the Company intends to
sell full fractional ownership interests entitling
the owner to use a simulator for 1,000 hours per
year or contract for not less than 1,000 hours of
use per year for five years and that TDI may decline
to accept any proposed purchase of fractional
ownership interests or contracts for hours.
ii. THREE YEAR PERIOD. B&B shall be entitled to receive
a vested warrant as Incentive Compensation with
respect to any fractional ownership interests sold
to, or hour increments contracted by, a B&B
potential purchaser for a simulator within three
years of the date of the initial meeting or
introduction of the B&B potential purchaser, as
arranged by
4
<PAGE>
B&B, with or to the Company. B&B will enter on
SCHEDULE I the date of the initial meeting or
introduction, as mutually agreed by the parties.
iii. EXERCISE PRICE. The per share exercise price under
each warrant granted to B&B as Incentive
Compensation shall be the lesser of: the amount per
share set forth in the table in paragraph 2.b.i
above or the fair market value per share on the date
that the contract, resulting in the issuance of the
warrant, is executed by both the B&B potential
purchaser and the Company. For purposes of this
paragraph 2, fair market value shall be (A) the
preceding business day's closing (last traded) price
for common stock of the Company, if the Company's
common stock is traded on an established trading
market in the United States of America, or (B) if
not so traded, then either (I) the price at which
each share of the Company's common stock was
actually sold in the most recent private equity
offering by the Company, or, if either the Company
or B&B so elects, (II) the fair market value
(excluding any minority or private company
discounts) established by an independent valuation
of the Company. The fair market value established by
an independent valuation shall be determined as of
the end of the month preceding the date of the
contract executed by the B&B potential purchaser and
the Company. If the Company or B&B chooses an
independent valuation, the parties shall mutually
select an independent appraiser or investment
banker, and the cost of such valuation shall be
borne equally by the parties.
c. ADJUSTMENTS. The number and type of shares which may be
purchased pursuant to each warrant shall be adjusted to
reflect appropriately the effect of any stock split,
reverse stock split, stock dividend, extraordinary dividend
or distribution, reorganization, recapitalization or other
change with respect to the Company's capital stock
occurring or having a record date after the date hereof and
prior to the issuance of the relevant Warrant.
3. EXPENSE REIMBURSEMENT. Out-of-pocket expenses incurred by B&B in
connection with services rendered by it hereunder shall be paid (whether or not
any efforts by B&B result in success for the Company) as follows:
a. EXPENSES UP TO $15,000. B&B shall pay all of its own
out-of-pocket expenses incurred in connection with services
rendered by it up to a cap of $15,000. B&B shall provide
copies of receipts or other documentation for such expenses
to the Company on a monthly basis.
5
<PAGE>
b. EXPENSES BETWEEN $15,000 AND $25,000. Thereafter, the
Company shall reimburse B&B for all of B&B's reasonable
out-of-pocket expenses incurred in excess of $15,000 up to
a cap of $25,000. The Company shall reimburse B&B for such
expenses and any out-of-pocket expenses incurred by B&B on
behalf of the Company on a monthly basis for all reasonable
amounts timely submitted to the Company in writing and
accompanied by receipts or other documentation.
c. EXPENSES IN EXCESS OF $25,000. Responsibility for payment
of out-of-pocket expenses which exceed the $25,000 cap will
be negotiated by the parties at that time.
d. LIMITATIONS ON EXPENSES. B&B agrees that it shall fly coach
class (frequent flyer upgrades permitted) on all domestic
flights and shall lodge in medium class range hotels (e.g.
Hilton, Marriot, Westin, etc.). All unusual costs (i.e.,
costs not associated with travel or entertainment of B&B
potential purchasers) in excess of $200 shall be approved
in advance by the Company.
4. TERMINATION OR RESIGNATION ("TERMINATION"). Either party may
terminate this Agreement at any time and for any reason upon thirty (30) days
advance written notice to the other party. Regardless of any termination, B&B
shall be deemed to have earned the Base Compensation set forth in paragraph 2.a
unless and to the extent that it fails to perform the services described in
paragraph 1 (unless such failure was due to the actions or inaction of the
Company). B&B's Incentive Compensation and expense reimbursement shall be
limited to warrants actually issued as Incentive Compensation under this
Agreement prior to the date of termination, expenses incurred through the date
of termination, and any Incentive Compensation that is subsequently earned
during any applicable three-year period. The confidentiality and indemnity
provisions of this Agreement shall survive termination.
5. CASH-OUT PROVISION:
a. CASH OUT RIGHTS. In the event that the Company has not
closed within four years of the date of this Agreement a
public offering of common stock of the Company made
pursuant to a Registration Statement filed by the Company
and effective under the Securities Act of 1933 or any
successor law, then B&B shall have rights as provided below
to be cashed out of up to all shares of Company stock held
by B&B as a result of the exercise of warrants issued under
this Agreement as well as all shares of Company stock
underlying unexercised warrants held by B&B (together, the
"B&B Shares").
b. EXERCISE OF RIGHTS. On and after the fourth anniversary of
this Agreement until the seventh anniversary of this
Agreement, B&B shall have four put rights that each require
the Company to purchase for cash up to 25% of the aggregate
B&B Shares. To exercise each
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<PAGE>
put, B&B shall provide written notice to the Company,
stating the specific number of B&B Shares to be cashed out
(the "cash-out notice"). No put right may be exercised
within six months of the exercise of any other put right.
After the exercise of a put right, the Company will
cash-out the B&B Shares on a date which is six months from
the date of the Company's receipt of the cash-out notice.
However, the Company may choose at any time and in its sole
election to cash-out the B&B Shares subject to an exercised
put at an earlier time. Upon the payment of the fair
market value of the B&B Shares subject to the exercised
put, those B&B Shares shall be returned to the Company,
free and clear of any liens, claims or security interests,
and canceled. B&B may withdraw and terminate the exercise
of any put at any time with respect to B&B Shares for which
payment has not yet been made by the Company, and B&B may,
in that event, re-exercise the put as to such B&B Shares as
if it had not been previously exercised. The cash-out
price shall be paid by certified or cashier's check or by
wire transfer to an account designated by B&B.
c. CASH-OUT PRICE. The price per B&B share at which B&B shall
be entitled to be cashed out upon the exercise of a put
shall be the fair market value on the date that the Company
receives the cash-out notice for that put. For purposes of
this paragraph 5, fair market value will be as determined
by agreement of the parties, or failing mutual agreement of
the parties within 30 days of the cash-out notice, by an
independent valuation of the fair market value at the end
of the month preceding the Company's receipt of the
cash-out notice (excluding any minority or private company
discounts), and less in any event the exercise price for
all unexercised warrants. The parties shall mutually select
an independent appraiser or investment banker, and the cost
of such valuation shall be borne equally by the parties.
d. TRANSFERABILITY. Babcock & Brown may transfer its rights
under this paragraph 5 in conjunction with the transfer of
any of its B&B Shares or the warrants issued under this
Agreement.
6. INDEMNITY. The Company agrees to indemnify B&B, and B&B agrees to
indemnify the Company, as set forth in SCHEDULE II hereto, which is incorporated
herein by reference.
7. CONFIDENTIALITY. Except to the extent authorized by the Company or
required by any federal or state law, rule or regulation or any decision or
order of any court or regulatory authority, B&B, including its agents,
employees, officers and directors, agrees that it will refrain from
(i) disclosing to any person, other than to any agents, attorneys, accountants,
employees, officers, and directors of B&B who need to know the information in
connection with B&B's engagement hereunder, or (ii) using, except in connection
with its performance of services hereunder, any confidential information which
has not become
7
<PAGE>
public about the Company received by B&B from the Company or its agents,
employees, attorneys or accountants in connection with the services rendered
hereunder, except for the purposes contemplated by this agreement.
8. NOTICES. Notices to be given under this Agreement shall be in
writing and mailed or delivered to the parties at the following addresses:
To Company: Training Devices International, Inc.
7367 S. Revere Parkway, Bldg 2C
Englewood, CO 80112-3931
Attn: Ronald C. Ellington
To B&B: Babcock & Brown LP
2 Harrison St., 6th Floor
San Francisco, California 94105
Attn: Robert L. Falkenberg III
With required copy to: General Counsel
9. THIRD PARTY BENEFICIARIES. This Agreement has been and is made
solely for the benefit of the Company, B&B and, in the case of Schedule II only,
also each of the Indemnified Persons defined in SCHEDULE II hereto, and their
respective successors and permitted assigns, and, except as provided in
paragraphs 5.d and 14, no other person shall acquire or have any right hereunder
by virtue of this Agreement.
10. ASSIGNMENT. This Agreement may not be assigned by either party
without first obtaining the written consent of the other party. The terms of
this Agreement shall be binding upon the successors and permitted assigns of the
respective parties hereto.
11. GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of Colorado.
12. ENTIRE AGREEMENT. This Agreement, along with the schedules
attached hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof.
13. COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
14. PARTY TO RECEIVE WARRANTS. B&B may designate in writing a party
other than itself to receive any warrant issued as Base or Incentive
Compensation under this Agreement by the Company, and the Company will issue
warrants to that designated party; provided, however, any such designation must
be accompanied by an opinion of counsel reasonably satisfactory to the Company
that the designation of that party will not result in any requirement to
register any warrants or securities issuable upon the exercise of warrants under
any applicable securities laws. Concurrent with the designation of a party to
receive a warrant, B&B may assign any rights under this Agreement relating to
the warrant to the designated party; and, upon acceptance of the warrant, the
receiving party
8
<PAGE>
shall be deemed to have assumed all obligations under this Agreement of B&B
relating to the warrant. No such designation or issuance of a warrant shall
relieve B&B of any obligations under this Agreement.
The parties have executed this Strategic Alliance Agreement as of the
date set forth in the first paragraph.
TRAINING DEVICES INTERNATIONAL, INC.
By:
---------------------------------------
Name: Ronald C. Ellington
Title: Chairman of the Board of Directors
and Chief Executive Officer
BABCOCK & BROWN LP
By: BABCOCK & BROWN GP LLC, its general
partner
------------------------------------------
By:
Its:
9
<PAGE>
SCHEDULE I
TO STRATEGIC ALLIANCE AGREEMENT
LIST OF POTENTIAL PURCHASERS AND INITIAL MEETINGS AND INTRODUCTIONS
NAME OF PURCHASER; MEETING OR ACTUAL DATE OF INITIAL MEETING
INTRODUCTION DATE GOAL OR INTRODUCTION
January 31, 2000 to February 5, 2000: *
1. Mesa Air Group
2. Great Lakes Airlines
3. Air Wisconsin January 31, 2000
4. Delta Airlines (Delta
connection management to
be targeted)
5. SkyWay Airlines February 1, 2000
ACTUAL DATE OF INITIAL MEETING
NAME OF PURCHASER; MEETING OR OR INTRODUCTION
INTRODUCTION DATE GOAL
February 14 to February 25, 2000: *
6. Comair
7. Airbus
8. Bombardier
9. Continental (Both
Continental and
Continental Express to be
targeted)
10. Dornier
11. U.S. Airways (regional
group head to be targeted)
NAME OF PURCHASER; MEETING OR ACTUAL DATE OF INITIAL MEETING
INTRODUCTION DATE GOAL OR INTRODUCTION
March 13, 2000 to March 22, 2000: *
<PAGE>
12. Atlantic Coast (ACA)
13. United Airlines (regional
group head to be targeted)
14. Express One
15. Midwest Express
16. Mesaba
NAME OF PURCHASER; MEETING OR ACTUAL DATE OF INITIAL MEETING
INTRODUCTION DATE GOAL OR INTRODUCTION
Other B&B Potential Purchasers:
17. PSA Airlines, Inc.
* DATES ARE APPROXIMATE ONLY.
<PAGE>
SCHEDULE II
TO STRATEGIC ALLIANCE AGREEMENT
INDEMNIFICATION BY COMPANY
A. INDEMNIFICATION BY COMPANY. If, in connection with services performed
under this Agreement, B&B or its affiliates become involved in any capacity in
any action or legal proceeding (pending or threatened), the Company agrees to
indemnify and hold harmless B&B and B&B's directors, officers, agents and
employees (together, the "B&B Indemnified Persons"), from and against any
losses, claims, damages or liabilities (or legal actions in respect thereof)
related to or arising out of such services, and will reimburse B&B Indemnified
Persons for all expenses (including reasonable out-of-pocket expenses and
reasonable counsel fees) incurred in connection with such pending or threatened
legal actions in which B&B is named as a party. The Company will not, however,
be responsible for any claims, liabilities, losses, damages or expenses which
are finally judicially determined to have resulted primarily from any of B&B
Indemnified Persons' willful misconduct, gross negligence or breach of this
Agreement. The Company also agrees that the B&B Indemnified Persons shall have
not any liability to the Company for or in connection with such engagement
except for any such liability for losses, claims, damages, liabilities or
expenses incurred by the Company that results primarily from the willful
misconduct or gross negligence of B&B Indemnified Persons or a breach of this
Agreement by a B&B Indemnified Person. If the foregoing indemnity is unavailable
or insufficient to hold the B&B Indemnified Persons harmless, then the Company
shall contribute to the amount paid or payable by the B&B Indemnified Persons in
respect of the B&B Indemnified Persons' losses, claims, damages, liabilities and
expenses in such proportion as appropriately reflects the relative benefits
received by, and fault of, the Company, on the one hand, and the B&B Indemnified
Persons, on the other, in connection with the matters as to which such losses,
claims, damages, liabilities or expenses relate and other equitable
considerations; provided, however, the Company agrees that B&B's contribution
shall in all cases be not more than the value of the compensation actually
received by B&B for its services hereunder.
B. INDEMNIFICATION BY B&B. If, in connection with services performed under
this Agreement, the Company or its affiliates become involved in any capacity in
any action or legal proceeding (pending or threatened), B&B agrees to indemnify
and hold harmless the Company and the Company's directors, officers, agents and
employees (together, the "Company Indemnified Persons"), from and against any
losses, claims, damages or liabilities (or legal actions in respect thereof)
related to or arising out of B&B Indemnified Persons' willful misconduct, gross
negligence or breach of this Agreement, and will reimburse the Company
Indemnified Persons for all expenses (including reasonable out-of-pocket
expenses and reasonable counsel fees) incurred in connection with such pending
or threatened legal actions in which the Company is named as a party.
C. OTHER. No party who may seek indemnification hereunder shall settle any
matter without the prior written consent of the other party, which consent will
not be unreasonably withheld. The foregoing agreements shall be in addition to
any rights that either party may have at common law or otherwise.
<PAGE>
SCHEDULE III
TO STRATEGIC ALLIANCE AGREEMENT
FORM OF WARRANT
<PAGE>
THIS WARRANT AND THE UNDERLYING SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"ACT"), AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE144 UNDER
THE ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
Warrant No._____
***TRAINING DEVICES INTERNATIONAL, INC.***
WARRANT TO PURCHASE SHARES OF COMMON STOCK
WARRANT TO PURCHASE ______________ SHARES
(SUBJECT TO ADJUSTMENT AS SET FORTH HEREIN)
EXERCISE PRICE $ [PRICE] PER SHARE
(SUBJECT TO ADJUSTMENT AS SET FORTH HEREIN)
VOID AFTER 3:00 P.M., MOUNTAIN TIME, ON [END DATE]
THIS CERTIFIES THAT [NAME], [ADDRESS] is entitled to purchase from
Training Devices Inc., a Colorado corporation (hereinafter called the "Company")
with its principal office located at 7367 South Revere Parkway, Building #2,
Englewood, Colorado 80112, at any time after 9:00 AM, on the date of issuance
but before 3:00 P.M., Mountain Time, on [five years after issuance] (the
"Termination Date"), at the purchase price of [PRICE] per share (the "Exercise
Price"), the number of shares (the "Shares") of the Company's Common Stock (the
"Common Stock") set forth above; provided that the Shares are vested. The
number of Shares purchasable upon exercise of this Warrant and the Exercise
Price per Share shall be subject to adjustment from time to time as set forth in
Section 4 below.
This Warrant concerns the [BASE COMPENSATION SECTION OF] [(FIRST-FOURTH)
SIMULATOR DESCRIBED IN THE INCENTIVE COMPENSATION SECTION OF] the Strategic
Alliance Agreement referenced in Section 2.1(b) below.
SECTION 1 DEFINITIONS.
The following terms used in this agreement shall have the following
meanings (unless otherwise expressly provided herein):
1.1 THE "ACT." The Securities Act of 1933, as amended.
1.2 THE "COMMISSION." The Securities and Exchange Commission.
1.3 THE "COMPANY." Training Devices Inc.
<PAGE>
1.4 "COMMON STOCK." The Company's Common Stock.
1.5 "CURRENT MARKET PRICE." The Current Market Price shall be
determined as follows:
(a) if the security at issue is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or
quoted on either the National Market System or the Small Cap Market of the
automated quotation service operated by Nasdaq, Inc. ("NASDAQ"), the current
value shall be the last reported sale price of that security on such exchange or
system on the day for which the Current Market Price is to be determined or, if
no such sale is made on such day, the average of the highest closing bid and
lowest asked price for such day on such exchange or system; or
(b) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges, the Current Market Value shall be the
average of the last reported highest bid and lowest asked prices quoted on the
NASDAQ Electronic Bulletin Board, or, if not so quoted, then by the National
Quotation Bureau, Inc. on the last business day prior to the day for which the
Current Market Price is to be determined; or
(c) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges and bid and asked prices are not
reported, the current market value shall be determined in such reasonable manner
as may be prescribed from time to time by the Board of Directors of the Company,
subject to the objection and arbitration procedure as described in Section 19
below.
1.6 "EXERCISE DATE." [____].
1.7 "EXERCISE PRICE." $[____] per Share, as modified in accordance
with Section (4), below.
1.8 "EXPIRATION DATE." [___]
1.9 "HOLDER " OR "WARRANTHOLDER." The person to whom this Warrant is
issued, and any valid transferee thereof pursuant to Section (3.1) below.
1.10 "NASD." The National Association of Securities Dealers, Inc.
1.11 "NASDAQ." The automated quotation system operated by Nasdaq Stock
Market, Inc.
1.12 "TERMINATION OF BUSINESS." Any sale, lease or exchange of all, or
substantially all, of the Company's assets or business or any dissolution,
liquidation or winding up of the Company.
2
<PAGE>
1.13 "WARRANTS." The warrants issued in accordance with the terms of
this Agreement and any Warrants issued in substitution for or replacement of
such warrants, including those evidenced by a certificate or certificates
originally issued or issued upon division, exchange, substitution or transfer
pursuant to this Agreement.
1.14 "WARRANT SECURITIES." The Common Stock purchasable upon exercise
of a Warrant including the Common Stock underlying unexercised portions of a
Warrant.
SECTION 2 TERM OF WARRANTS; EXERCISE OF WARRANT.
2.1 EXERCISE OF WARRANT; FULLY VESTED.
(a) Subject to the terms of this Agreement, the Holder shall have
the right, at any time prior to 5:00 p.m., Denver Time, on the Expiration Date,
to purchase from the Company up to the number of fully paid and nonassessable
Shares to which the Holder may at the time be entitled to purchase pursuant to
this Agreement, upon surrender to the Company, at its principal office, of the
Warrant to be exercised, together with the purchase form on the reverse thereof,
or the Warrant Conversion Exercise Form in the case of a warrant conversion
pursuant to Section (2.3) herein, duly filled in and signed, and upon payment to
the Company of the Exercise Price for the number of Shares in respect of which
such Warrants are then exercised, but in no event for less than 100 Shares
(unless fewer than an aggregate of 100 shares are then purchasable under all
outstanding Warrants held by a Holder).
(b) As stated in the Strategic Alliance Agreement dated as of
January 31, 2000 between the Company and Babcock & Brown, LP, as it may be
amended from time to time, all Shares subject to this Warrant are fully vested.
2.2 PAYMENT OF EXERCISE PRICE. Payment of the aggregate Exercise
Price shall be made in cash or by check, or any combination thereof.
2.3 ISSUANCE OF SHARES. Upon such surrender of the Warrants and
payment of such Exercise Price as aforesaid, the Company shall issue and cause
to be delivered with all reasonable dispatch to or upon the written order of the
Holder and in such name or names as the Holder may designate, a certificate or
certificates for the number of full Shares so purchased upon the exercise of the
Warrant, together with cash, as provided in Section (12) hereof, in respect of
any fractional Shares otherwise issuable upon such surrender.
2.4 CONVERSION RIGHT. In addition to and without limiting the rights
of the Warrantholder under the terms of the Warrant, the Holder shall have the
right (the "Conversion Right") to convert the Warrant evidenced by this
certificate or any portion thereof into Shares as provided in this Section 2.4
at any time or from time to time prior to its expiration.
(a) Upon exercise of the Conversion Right with respect to a
particular number of Shares (the "Conversion Shares"), the Company shall deliver
to the Holder,
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<PAGE>
without payment by the Holder of any Exercise Price or any cash or other
consideration, that number of Shares equal to the quotient obtained by dividing
the Net Value (as hereinafter defined in this paragraph 2.4(a)) of the Converted
Shares by the Current Market Price of a single Share, determined in each case as
of the close of business on the Conversion Date (as hereinafter defined). The
"Net Value" of the Converted Shares shall be determined by subtracting the
aggregate Exercise Price of the Converted Shares from the aggregate Current
Market Price of the Converted Shares. No fractional securities shall be
issuable upon exercise of the Conversion Right, and if the number of securities
to be issued in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the Holder an amount in cash equal to the
Current Market Price of the resulting fractional Share.
(b) The Conversion Right may be exercised by the Holder by the
surrender of the Warrant at the principal office of the Company or at the office
of the Company's stock transfer agent, if any, together with a written statement
specifying that the Holder thereby intends to exercise the Conversion Right and
indicating the number of Shares subject to the Warrant which are being
surrendered (referred to in subparagraph 2.3(a) above as the Converted Shares),
on the reverse side of the Warrant, in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of the Warrant, or on
such later date as is specified therein (the "Conversion Date"), but not later
than the Expiration Date. Certificates for the Converted Shares issuable upon
exercise of the Conversion Right, together with a check in payment of any
fractional Warrant Share and, in the case of a partial exercise a new Warrant
evidencing the Warrant Shares remaining subject to the Warrant, shall be issued
as of the Conversion Date and shall be delivered to the Holder within seven (7)
days following the Conversion Date.
2.5 Upon receipt of the Warrant by the company as described in
Sections 2.1 or 2.4 above, the Holder shall be deemed to be the holder of record
of the Shares issuable upon such exercise, notwithstanding that the transfer
books of the Company may then be closed or that certificates representing such
Shares may not have been prepared or actually delivered to the Holder.
SECTION 3 TRANSFERABILITY AND FORM OF WARRANT.
3.1 LIMITATION ON TRANSFER. Any assignment or transfer of a Warrant
shall be made by the presentation and surrender of the Warrant to the Company at
its principal office or the office of its transfer agent, if any, accompanied by
a duly executed Assignment Form. Upon the presentation and surrender of these
items to the Company, the Company, at its sole expense, shall execute and
deliver to the new Holder or Holders a new Warrant or Warrants, in the name of
the new Holder or Holders as named in the Assignment Form, and the Warrant
presented or surrendered shall at that time be canceled.
3.2 EXCHANGE OF CERTIFICATE. Any Warrant may be exchanged for another
certificate or certificates entitling the Warrantholder to purchase a like
aggregate number
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<PAGE>
of Shares as the certificate or certificates surrendered then entitled such
Warrantholder to purchase. Any Warrantholder desiring to exchange a Warrant
shall make such request in writing delivered to the Company, and shall
surrender, properly endorsed, with signatures guaranteed, the certificate
evidencing the Warrant to be so exchanged. Thereupon, the Company shall execute
and deliver to the person entitled thereto a new Warrant as so requested.
3.3 MUTILATED, LOST, STOLEN, OR DESTROYED CERTIFICATE. In case the
certificate or certificates evidencing the Warrants shall be mutilated, lost,
stolen or destroyed, the Company shall, at the request of the Warrantholder,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificate or certificates lost, stolen or destroyed, a new Warrant or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence satisfactory to the Company of such loss, theft or
destruction of such Warrant and a bond of indemnity, if requested, also
satisfactory in form and amount, at the applicant's cost. Applicants for such
substitute Warrant shall also comply with such other reasonable regulations and
pay such other reasonable charges as the Company may prescribe.
3.4 FORM OF CERTIFICATE. The text of the Warrant and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit A
attached hereto. The number of Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants shall be executed on behalf of the Company by its
President or by a Vice President and attested to by its Secretary or an
Assistant Secretary. A Warrant bearing the signature of an individual who was
at any time the proper officer of the Company shall bind the Company,
notwithstanding that such individual shall have ceased to hold such officer
prior to the delivery of such Warrant or did not hold such office on the date of
this Agreement.
The Warrants shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.
SECTION 4 ADJUSTMENT OF NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
4.1 ADJUSTMENTS. The number of Shares purchasable upon the exercise
of the Warrants shall be subject to adjustments as follows:
(a) In case the Company shall (i) pay a dividend in Common Stock
or make a distribution to its stockholders in Common Stock, (ii) subdivide its
outstanding Common Stock, (iii) combine its outstanding Common Stock into a
smaller number of shares of Common Stock, or (iv) issue by classification of its
Common Stock other
5
<PAGE>
securities of the Company, the number of Shares purchasable upon exercise of the
Warrants immediately prior thereto shall be adjusted so that the Warrantholder
shall be entitled to receive the kind and number of Shares or other securities
of the Company which it would have owned or would have been entitled to receive
immediately after the happening of any of the events described above, had the
Warrants been exercised immediately prior to the happening of such event or any
record date with respect thereto. Any adjustment made pursuant to this
subsection (4.1.(a)) shall become effective immediately after the effective date
of such event retroactive to the record date, if any, for such event.
(b) In case the Company shall issue rights, options, warrants, or
convertible securities to all or substantially all holders of its Common Stock,
without any charge to such holders, entitling them to subscribe for or purchase
Common Stock at a price per share which is lower at the record date mentioned
below than the then Current Market Price, the number of Shares thereafter
purchasable upon the exercise of each Warrant shall be determined by multiplying
the number of Shares theretofore purchasable upon exercise of the Warrants by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such rights, options, warrants
or convertible securities plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the denominator shall be the
number of shares of Common Stock outstanding immediately prior to the issuance
of such rights, options, warrants, or convertible securities plus the number of
shares which the aggregate offering price of the total number of shares offered
would purchase at such Current Market Price. Such adjustment shall be made
whenever such rights, options, warrants, or convertible securities are issued,
and shall become effective immediately and retroactively to the record date for
the determination of stockholders entitled to receive such rights, options,
warrants, or convertible securities.
(c) In case the Company shall distribute to all or substantially
all holders of its Common Stock evidences of its indebtedness or assets
(excluding cash dividends or distributions out of earnings) or rights, options,
warrants, or convertible securities containing the right to subscribe for or
purchase Common Stock (excluding those referred to in subsection (4.1(b))
above), then in each case the number of Shares thereafter purchasable upon the
exercise of the Warrants shall be determined by multiplying the number of Shares
theretofore purchasable upon exercise of the Warrants by a fraction, of which
the numerator shall be the then Current Market Price on the date of such
distribution, and of which the denominator shall be such Current Market Price on
such date minus the then fair value (determined as provided in subparagraph (f)
below of the portion of the assets or evidences of indebtedness so distributed
or of such subscription rights, options, warrants, or convertible securities
applicable to one share. Such adjustment shall be made whenever any such
distribution is made and shall become effective on the date of distribution
retroactive to the record date for the determination of stockholders entitled to
receive such distribution.
(d) If the Company shall issue "Additional Stock" (as defined
below) for a consideration per share less than the Exercise Price in effect on
the date and
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immediately prior to such issue, then and in such event, the Exercise Price
shall be reduced concurrently with such issue, to a price (calculated to three
decimal places) determined by multiplying such Exercise Price by a fraction (i)
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue, plus the number of shares of Common Stock which
the aggregate consideration received by the Company for the total number of
Additional Stock so issued (or deemed to be issued) would purchase at such
Exercise Price; and (ii) the denominator of which shall be the number of shares
of Common Stock outstanding immediately prior to such issue plus the number of
shares of Additional Stock so issued. For purposes of this subsection,
"Additional Stock" shall mean all Common Stock issued by the Company after the
date hereof, except that, notwithstanding any other provision, the term
"Additional Stock" shall exclude any and all of the following:
i. Shares, or options or other rights to acquire Common
Stock, issued to employees other than directors or executive officers (as
defined in Rule 3b-7 of the Securities and Exchange Commission on January 31,
2000) of the Company or any of its Affiliates (as defined in Rule 12b-2 of the
Securities and Exchange Commission on January 31, 2000) as incentives or
compensation;
ii. Shares issued to satisfy options or other rights which
are issued to employees as described in clause i above or which were issued
prior to the date of this Warrant;
iii. Shares issued in consideration for the purchase by the
Company or any of its Affiliates of all or a material portion of a business or
50% or more of the outstanding voting securities of an entity;
iv. Shares, or options or other rights to acquire Common
Stock issued upon the conversion of any debt of the Company or any of its
Affiliates into shares of Common Stock, and shares issued to satisfy such
options or other rights; and
v. Any shares, options or other rights to acquire Common
Stock issued to any lender and considered for purposes of the Company's
financial statements as part of the interest or cost of funds for amounts
borrowed by the Company or any of its Affiliates from the lender.
For the purpose of making any adjustment in the Exercise price as
provided above, the consideration received by the Company for any issue or sale
of Common Stock will be computed:
i. to the extent it consists of cash, as the amount of
cash received by the Company before deduction of any offering expenses payable
by the Company and any underwriting or similar commissions, compensation, or
concessions paid or allowed by the Company in connection with such issue or
sale;
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ii. to the extent it consists of property other than cash,
at the fair market value of that property as determined in good faith by the
Company's Board of Directors; and
iii. if Common Stock is issued or sold together with other
stock or securities or other assets of the Company for a consideration which
covers both, as the portion of the consideration so received that may be
reasonably determined in good faith by the Board of Directors to be allocable to
such Common Stock.
If the Company (1) grants any right or options to subscribe for,
purchase, or otherwise acquire shares of Common Stock, or (2) issues or sells
any security convertible into shares of Common Stock, then, in each case, the
price per share of Common Stock issuable on the exercise of the rights or
options or the conversion of the securities will be determined by dividing the
total amount, if any, received or receivable by the Company as consideration for
the granting of the rights or options or the issue or sale of the convertible
securities, plus the minimum aggregate amount of additional consideration
payable to the Company on exercise or conversion of the securities, by the
maximum number of shares of Common Stock issuable on the exercise of conversion.
Such granting or issue or sale will be considered to be an issue or sale for
cash of the maximum number of shares of Common Stock issuable on exercise or
conversion at the price per share determined under this subsection, and the
Exercise Price will be adjusted as above provided to reflect (on the basis of
that determination) the issue or sale. No further adjustment of the Exercise
Price will be made as a result of the actual issuance of shares of Common Stock
on the exercise of any such rights or options or the conversion of any such
convertible securities.
Upon the redemption or repurchase of any such securities or the
expiration or termination of the right to convert into, exchange for, or
exercise with respect to, Common Stock, the Exercise Price will be readjusted to
such price as would have been obtained had the adjustment made upon their
issuance been made upon the basis of the issuance of only the number of such
securities as were actually converted into, exchanged for, or exercised with
respect to, Common Stock. If the purchase price or conversion or exchange rate
provided for in any such security changes at any time, then, upon such change
becoming effective, the Exercise Price then in effect will be readjusted
forthwith to such price as would have been obtained had the adjustment made upon
the issuance of such securities been made upon the basis of (x) the issuance of
only the number of shares of Common Stock theretofore actually delivered upon
the conversion, exchange or exercise of such securities, and the total
consideration received therefor, and (y) the granting or issuance, at the time
of such change, of any such securities then still outstanding for the
consideration, if any, received by the Company therefor and to be received on
the basis of such changed price or rate.
(e) No adjustment in the number of Shares purchasable pursuant to
the Warrants shall be required unless such adjustment would require an increase
or decrease of at least one percent in the number of Shares then purchasable
upon the exercise of the Warrants or, if the Warrants are not then exercisable,
the number of Shares purchasable
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upon the exercise of the Warrants on the first date thereafter that the Warrants
become exercisable; provided, however, that any adjustments which by reason of
this subsection (4.1(e)) are not required to be made immediately shall be
carried forward and taken into account in any subsequent adjustment.
(f) Whenever the number of Shares purchasable upon the exercise
of the Warrant is adjusted, as herein provided, the Exercise Price payable upon
exercise of the Warrant shall be adjusted by multiplying such Exercise Price
immediately prior to such adjustment by a fraction, of which the numerator shall
be the number of Warrant Shares purchasable upon the exercise of the Warrant
immediately prior to such adjustment, and of which the denominator shall be the
number of Warrant Shares so purchasable immediately thereafter.
(g) Whenever the number of Shares purchasable upon exercise of
the Warrants is adjusted as herein provided, the Company shall cause to be
promptly mailed to the Warrantholder by first class mail, postage prepaid,
notice of such adjustment and a certificate of the chief financial officer of
the Company setting forth the number of Shares purchasable upon the exercise of
the Warrants after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was made.
(h) For the purpose of this Section (4.1), the term "Common
Stock" shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement, 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. In the event that at any time, as a result of
an adjustment made pursuant to this Section (4), the Warrantholder shall become
entitled to purchase any securities of the Company other than Common Stock, (y)
if the Warrantholder's right to purchase is on any other basis than that
available to all holders of the Company's Common Stock, the Company shall obtain
an opinion of an independent investment banking firm valuing such other
securities and (z) thereafter the number of such other securities so purchasable
upon exercise of the Warrants shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Shares contained in this Section (4).
(i) Upon the expiration of any rights, options, warrants, or
conversion privileges, if such shall have not been exercised, the number of
Shares purchasable upon exercise of the Warrants, to the extent the Warrants
have not then been exercised, shall, upon such expiration, be readjusted and
shall thereafter be such as they would have been had they been originally
adjusted (or had the original adjustment not been required, as the case may be)
on the basis of (i) the fact that the only shares of Common Stock so issued were
the shares of Common Stock, if any, actually issued or sold upon the exercise of
such rights, options, warrants, or conversion privileges, and (ii) the fact that
such shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the consideration, if
any, actually
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received by the Company for the issuance, sale or grant of all such rights,
options, warrants, or conversion privileges whether or not exercised; provided,
however, that no such readjustment shall have the effect of decreasing the
number of Shares purchasable upon exercise of the Warrants by an amount in
excess of the amount of the adjustment initially made in respect of the
issuance, sale, or grant of such rights, options, warrants, or conversion
rights.
4.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section (4.1),
no adjustment in respect of any dividends or distributions out of earnings shall
be made during the term of the Warrants or upon the exercise of the Warrants.
4.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments shall be made
pursuant to Section (4) hereof in connection with the issuance of the Common
Stock upon exercise of the Warrants. No adjustments shall be made pursuant to
Section (4) hereof in connection with grant or exercise of presently authorized
or outstanding options to purchase, or the issuance of shares of Common Stock
under the Company's director or employee benefit plan.
4.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation, or in case of any sale or conveyance to
another corporation of the property, assets, or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with the Warrantholder
an agreement that the Warrantholder shall have the right thereafter upon payment
of the Exercise Price in effect immediately prior to such action to purchase,
upon exercise of the Warrants, the kind and amount of shares and other
securities and property which it would have owned or have been entitled to
receive after the happening of such consolidation, merger, sale, or conveyance
had the Warrants been exercised immediately prior to such action. In the event
of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of
1986, in which the Company is the surviving corporation, the right to purchase
Shares under the Warrants shall terminate on the date of such merger and
thereupon the Warrants shall become null and void, but only if the controlling
corporation shall agree to substitute for the Warrants, its warrants which
entitle the holder thereof to purchase upon their exercise the kind and amount
of shares and other securities and property which it would have owned or been
entitled to receive had the Warrants been exercised immediately prior to such
merger. Any such agreements referred to in this Section (4.4) shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section (4) hereof. The provisions of this Section
(4.4) shall similarly apply to successive consolidations, mergers, sales, or
conveyances.
4.5 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any action
which would cause an adjustment effectively reducing the portion of the Exercise
Price allocable to each Share below the par value per share of the Common Stock
issuable upon exercise of the Warrants, the Company will take any corporate
action which may,
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in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Common Stock upon
exercise of the Warrants.
4.6 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this Section (4), and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section (4).
4.7 STATEMENT ON WARRANTS. Irrespective of any adjustments in the
number of securities issuable upon exercise of the Warrants, Warrants
theretofore or thereafter issued may continue to express the same number of
securities as are stated in the similar Warrants initially issuable pursuant to
this Agreement. However, the Company may, at any time in its sole discretion
(which shall be conclusive), make any change in the form of Warrant that it may
deem appropriate and that does not affect the substance thereof; and any Warrant
thereafter issued, whether upon registration of transfer of, or in exchange or
substitution for, an outstanding Warrant, may be in the form so changed.
4.8 TREASURY STOCK. For purposes of this Section (4), shares of
Common Stock owned or held at any relevant time by, or for the account of, the
Company, in its treasury or otherwise, shall not be deemed to be outstanding for
purposes of the calculations and adjustments described.
SECTION 5 NOTICE TO HOLDERS.
If, prior to the expiration of this Warrant either by its terms or by its
exercise in full, any of the following shall occur:
(a) the Company shall declare a dividend or authorize any other
distribution on its Common Stock; or
(b) the Company shall authorize the granting to the shareholders
of its Common Stock of rights to subscribe for or purchase any securities or any
other similar rights; or
(c) any reclassification, reorganization or similar change of the
Common Stock, or any consolidation or merger to which the Company is a party, or
the sale, lease, or exchange of any significant portion of the assets of the
Company; or
(d) the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) any purchase, retirement or redemption by the Company of its
Common Stock;
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then, and in any such case, the Company shall deliver to the Holder or Holders
written notice thereof at least 30 days prior to the earliest applicable date
specified below with respect to which notice is to be given, which notice shall
state the following:
(x) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights, or, if a record is not to be taken, the
date as of which the shareholders of Common Stock of record to be entitled to
such dividend, distribution or rights are to be determined;
(y) the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, dissolution, liquidation, winding up or
purchase, retirement or redemption is expected to become effective, and the
date, if any, as of which the Company's shareholders of Common Stock of record
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, sale, transfer, dissolution, liquidation, winding up, purchase,
retirement or redemption; and
(z) if any matters referred to in the foregoing clauses (x) and
(y) are to be voted upon by shareholders of Common Stock, the date as of which
those shareholders to be entitled to vote are to be determined.
SECTION 6 OFFICERS' CERTIFICATE.
Whenever the Exercise Price or the aggregate number of Warrant Securities
purchasable pursuant to this Warrant shall be adjusted as required by the
provisions of Section (4) above, the Company shall promptly file with its
Secretary or an Assistant Secretary at its principal office, and with its
transfer agent, if any, an officers' certificate executed by the Company's
President and Secretary or Assistant Secretary, describing the adjustment and
setting forth, in reasonable detail, the facts requiring such adjustment and the
basis for and calculation of such adjustment in accordance with the provisions
of this Warrant. Each such officers' certificate shall be made available to the
Holder or Holders of this Warrant for inspection at all reasonable times, and
the Company, after each such adjustment, shall promptly deliver a copy of the
officers' certificate relating to that adjustment to the Holder or Holders of
this Warrant. The officers' certificate described in this Section (6) shall be
deemed to be conclusive as to the correctness of the adjustment reflected
therein if, and only if, no Holder of this Warrant delivers written notice to
the Company of an objection to the adjustment within 30 days after the officers'
certificate is delivered to the Holder or Holders of this Warrant. The Company
will make its books and records available for inspection and copying during
normal business hours by the Holder so as to permit a determination as to the
correctness of the adjustment. If written notice of an objection is delivered
by a Holder to the Company and the parties cannot reconcile the dispute, the
Holder and the Company shall submit the dispute to arbitration pursuant to the
provisions of Section 19 below. Failure to prepare or provide the officers'
certificate shall not modify the parties' rights hereunder.
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SECTION 7 RESERVATION OF WARRANT SECURITIES.
There has been reserved, and the Company shall at all times keep reserved
so long as the Warrants remain outstanding, out of its authorized and unissued
Common Stock, such number of shares of Common Stock as shall be subject to
purchase under the Warrants. Every transfer agent for the Common Stock and
other securities of the Company issuable upon the exercise of the Warrants will
be irrevocably authorized and directed at all times to reserve such number of
authorized shares and other securities as shall be requisite for such purpose.
The Company will keep a copy of this Agreement on file with every transfer agent
for the Common Stock and other securities of the Company issuable upon the
exercise of the Warrants. The Company will supply every such transfer agent
with duly executed stock and other certificates, as appropriate, for such
purpose and will provide or otherwise make available any cash which may be
payable as provided in Section 12 hereof.
SECTION 8 RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
8.1 RESTRICTIONS ON TRANSFER. The Warrantholder agrees that prior to
making any disposition of the Warrants or the Shares, the Warrantholder shall
give written notice to the Company describing briefly the manner in which any
such proposed disposition is to be made; and no such disposition shall be made
if the Company has notified the Warrantholder that in the opinion of counsel
reasonably satisfactory to the Warrantholder a registration statement or other
notification or post-effective amendment thereto (hereinafter collectively a
"Registration Statement") under the Act is required with respect to such
disposition and no such Registration Statement has been filed by the Company
with, and declared effective, if necessary, by, the Commission.
8.2 PIGGY-BACK REGISTRATION RIGHT. If at any time prior to the
Expiration Date the Company files a registration statement with the Commission
pursuant to the Act, or pursuant to any other act passed after the date of this
Agreement, which filing provides for the sale of securities by the Company to
the public, or files a Regulation A offering statement under the Act, the
Company shall offer to the Holder or Holders of this Warrant and the holders of
any Warrant Securities the opportunity to register or qualify the Warrant
Securities at the Company's sole expense, regardless of whether the Holder or
Holders of this Warrant or the holders of Warrant Securities or both may have
previously availed themselves of any of the registration rights described in
this Section (8); provided, however, that in the case of a Regulation A
offering, the opportunity to qualify shall be limited to the amount of the
available exemption after taking into account the securities that the Company
wishes to qualify. Notwithstanding anything to the contrary, this Section (8.2)
shall not be applicable to a registration statement registering securities
issued pursuant to an employee benefit plan or as to a transaction subject to
Rule 145 promulgated under the Act or which a form S-4 registration statement
could be used; nor shall it be applicable to the first underwritten registered
public offering of the Company.
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The Company shall deliver written notice to the Holder or Holders of this
Warrant and to any holders of the Warrant Securities of its intention to file a
registration statement or Regulation A offering statement under the Act at least
60 days prior to the filing of such registration statement or offering
statement, and the Holder or Holders and holders of Warrant Securities shall
have 30 days thereafter to request in writing that the Company register or
qualify the Warrant Securities or the Warrant Securities underlying the
unexercised portion of this Warrant in accordance with this Section (8.2). Upon
the delivery of such a written request within the specified time, the Company
shall be obligated to include in its contemplated registration statement or
offering statement all information necessary or advisable to register or qualify
the Warrant Securities or Warrant Securities underlying the unexercised portion
of this Warrant for a public offering, if the Company does file the contemplated
registration statement or offering statement; provided, however, that neither
the delivery of the notice by the Company nor the delivery of a request by a
Holder or by a holder of Warrant Securities shall in any way obligate the
Company to file a registration statement or offering statement. Furthermore,
notwithstanding the filing of a registration statement or offering statement,
the Company may, at any time prior to the effective date thereof, determine not
to offer the securities to which the registration statement or offering
statement relates, other than the Warrant, Warrant Securities and Warrant
Securities underlying the unexercised portion of this Warrant. Notwithstanding
the foregoing, if, as a qualification of any offering in any state or
jurisdiction in which the Company (by vote of its Board of Directors) or any
underwriter determines in good faith that it wishes to offer securities
registered in the offering, it is required that offering expenses be allocated
in a manner different from that provided above, then the offering expenses shall
be allocated in whatever manner is most nearly in compliance with the provisions
set out above.
If the registration for which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise as part of the written notice given pursuant to this Section. In such
event, the right of any Warrantholder or holder of Shares to registration
pursuant to this Section (8.2) shall be conditioned upon such holder's
participation in such underwriting, and the inclusion of Shares in the
underwriting shall be limited to the extent provided herein. All holders
proposing to distribute their Shares through such underwriting shall (together
with the Company and the other holders distributing their Shares through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section, if the managing underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten, such underwriter may limit the amount of securities to be
included in the registration and underwriting by the holders of Company
securities exercising "piggyback" registration rights (including the
Warrantholder and each holder of Warrants and Shares). The Company shall so
advise all such holders, and the number of shares of such securities that may be
included in the registration and underwriting shall be allocated among all of
such holders, in proportion, as nearly as practicable, to the respective amounts
of securities requested to be included in such registration held by such holders
at the time of filing the registration statement, provided, however, that no
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security holder other than one exercising a demand registration right shall have
superior rights with respect to inclusion in a registration than those of the
Warrantholder and each holder of Warrants and Shares and if any party is granted
such superior rights hereafter the Warrantholder and each holder of Warrants and
Shares shall be deemed to be automatically granted similar rights. The Company
shall advise all such holders of any such limitations and of the number or
securities that may be included in the registration. Any securities excluded or
withdrawn from such underwriting shall not be transferred prior to one hundred
twenty (120) days after the effective date of the registration statement
relating thereto, or such shorter period of time as the underwriters may
require.
The Company shall comply with the requirements of this Section (8.2) and
the related requirements of Section (8.6) at its own expense. That expense
shall include, but not be limited to, legal, accounting, consulting, printing,
federal and state filing fees, NASD fees, out-of-pocket expenses incurred by
counsel, accountants and consultants retained by the Company, and miscellaneous
expenses directly related to the registration statement or offering statement
and the offering. However, this expense shall not include the portion of any
underwriting commissions, transfer taxes and the underwriter's accountable and
nonaccountable expense allowances attributable to the offer and sale of the
Warrant, Warrant Securities and the Warrant Securities underlying the
unexercised portion of this Warrant, all of which expenses shall be borne by the
Holder or Holders of this Warrant and the holders of the Warrant Securities
registered or qualified.
8.3 INCLUSION OF INFORMATION. In the event that the Company registers
or qualifies the Warrant Securities pursuant to Section (8.2) above, the Company
shall include in the registration statement or qualification, and the prospectus
included therein, all information and materials necessary or advisable to comply
with the applicable statutes and regulations so as to permit the public sale of
the Warrant Securities or the Warrant Securities underlying the unexercised
portion of this Warrant. As used in Section (8.2), reference to the Company's
securities shall include, but not be limited to, any class or type of the
Company's securities or the securities of any of the Company's subsidiaries or
affiliates.
8.4 REQUEST FOR REGISTRATION ON FORM S-3. If a Holder or Holders of
the outstanding Warrant Securities request that the Company file a registration
statement on Form S-3 (or any successor form to Form S-3) for a public offering
of 100,000 shares of Warrant Securities (subject to adjustment in the same
manner as provided in Section 4.1(a) in the event of a stock dividend, a
subdivision of the outstanding Common Stock, a combination of outstanding Common
Stock, or reclassification of the Common Stock), and the Company is a registrant
entitled to use Form S-3 to register the Warrant Securities for such an
offering, the Company shall use all reasonable efforts to file and cause to be
effective a registration statement for the resale of the Warrant Securities on
such form; provided, however, that the Company shall not be required to effect
more than one registration pursuant to this Section 8.4 in any 12 month period.
The substantive provisions of Section 8 shall be applicable to each registration
initiated under this Section 8.4. Notwithstanding any other provisions of this
Section 8, the Company
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shall maintain the effectiveness of any registration statement, filed pursuant
to this Section 8.4 and made effective by the SEC, for a period of 90 days.
In addition, notwithstanding any other provisions of this Section 8, any
holder of Warrant Securities wishing to sell Warrant Securities pursuant to the
registration statement, shall notify the Company two business days prior to
selling any Warrant Securities. Anything in this Agreement to the contrary
notwithstanding, the Company shall be entitled to postpone for a period of time
in its reasonable judgment, but not to exceed 120 days (a "Blackout Period"),
the filing of any registration statement in accordance with this Section 8.4,
and the preparation and/or filing of any prospectus or any amendments or
supplements to any registration statement or prospectus, if Company reasonably
determines that any such filing or the offering of any Warrant Securities would
(i) impede, delay or otherwise interfere with any financing, offer or sale of
securities, acquisition, corporate reorganization or other significant
transaction involving Company or any of its Affiliates, or (ii) require
disclosure of material information which, if disclosed at that time, would be
harmful to the interests of Company and its stockholders; PROVIDED, HOWEVER,
that, in the Blackout Period pursuant to (ii) above, the Blackout Period shall
earlier terminate upon public disclosure by Company or public admission by
Company of such material information. Upon notice by Company to any Holder of
such determination, the Holder covenants that the Holder shall (i) keep the fact
of any such notice strictly confidential, (ii) promptly halt any offer or sale
of the Warrant Securities for the duration of the Blackout Period set forth in
such notice (or until earlier terminated in writing by Company) and
(iii) promptly halt any use, publication, dissemination or distribution of the
registration statement, each prospectus included therein, and any amendment or
supplement thereto by the Holder or Affiliates for the duration of the Blackout
Period set forth in such notice (or until earlier terminated in writing by
Company).
8.5 PAYMENT OF EXERCISE PRICE FROM PROCEEDS. In the event that any
such Registration Statement is utilized for a public offering of any of the
Shares to be received upon exercise of the Warrants pursuant to this Section
(8), the Warrantholder may elect to pay the exercise price of the Warrants to
the Company out of the proceeds of the sale of the Shares pursuant to the
Registration Statement concurrently with the closing of such sale of the Shares;
provided that if such sale is not closed within 90 days of the effective date of
such Registration Statement, then the Warrantholder shall be obligated to pay
the exercise price of the Warrants to the Company on such 90 day.
8.6 CONDITION OF COMPANY'S OBLIGATIONS. As to each registration
statement or offering statement, the Company's obligations contained in this
Section (8) shall be conditioned upon a timely receipt by the Company in writing
of the following:
(a) Information as to the terms of the contemplated public
offering furnished by and on behalf of each Holder or holder intending to make a
public distribution of the Warrant Securities or Warrant Securities underlying
the unexercised portion of the Warrant; and
16
<PAGE>
(b) Such other information as the Company may reasonably require
from such Holders or holders, or any underwriter for any of them, for inclusion
in the registration statement or offering statement.
8.7 ADDITIONAL REQUIREMENTS. In each instance in which the Company
shall take any action to register or qualify the Warrant Securities or the
Warrant Securities underlying the unexercised portion of this Warrant, if any,
pursuant to this Section (8), the Company shall do the following:
(a) supply to the holders of Warrant Securities whose Warrant
Securities are being registered or qualified, two (2) manually signed copies of
each registration statement or offering statement, and all amendments thereto,
and a reasonable number of copies of the preliminary, final or other prospectus
or offering circular, all prepared in conformity with the requirements of the
Act and the rules and regulations promulgated thereunder, and such other
documents as the holders shall reasonably request;
(b) cooperate with respect to (i) all necessary or advisable
actions relating to the preparation and the filing of any registration
statements or offering statements, and all amendments thereto, arising from the
provisions of this Section (8), (ii) all reasonable efforts to establish an
exemption from the provisions of the Act or any other federal or state
securities statutes, (iii) all necessary or advisable actions to register or
qualify the public offering at issue pursuant to federal securities statutes and
the state "blue sky" securities statutes of each jurisdiction that the Holders
of the Warrant or holders of Warrant Securities shall reasonably request, and
(iv) all other necessary or advisable actions to enable the Holders of the
Warrant Securities to complete the contemplated disposition of their securities
in each reasonably requested jurisdiction; and
(c) keep all registration statements or offering statements to
which this Section (8) applies, and all amendments thereto, effective under the
Act for a period of at least 9 months after their initial effective date and
cooperate with respect to all necessary or advisable actions to permit the
completion of the public sale or other disposition of the securities subject to
a registration statement or offering statement.
8.8 RECIPROCAL INDEMNIFICATION. In each instance in which pursuant to
this Section (8) the Company shall take any action to register or qualify the
Securities or the Warrant Securities underlying the unexercised portion of this
Warrant, prior to the effective date of any registration statement or offering
statement, the Company and each Holder or holder of Warrants or Warrant
Securities being registered or qualified shall enter into reciprocal
indemnification agreements, in the form customarily used by reputable investment
bankers with respect to public offerings of securities, containing substantially
the same terms as described in Section (10) . These indemnification agreements
also shall contain an agreement by the Holder or shareholder at issue to
indemnify and hold harmless the Company, its officers and directors from and
against any and all losses, claims, damages and liabilities, including, but not
limited to, all expenses reasonably incurred in investigating, preparing,
defending or settling any claim, directly
17
<PAGE>
resulting from any untrue statements of material facts, or omissions to state a
material fact necessary to make a statement not misleading, contained in a
registration statement or offering statement to which this Section (8) applies,
if, and only if, the untrue statement or omission directly resulted from
information provided in writing to the Company by the indemnifying Holder or
shareholder expressly for use in the registration statement or offering
statement at issue.
8.9 SURVIVAL. The Company's obligations described in this Section (8)
shall continue in full force and effect regardless of the exercise, surrender,
cancellation or expiration of this Warrant.
SECTION 9 PAYMENT OF TAXES.
The Company will pay all documentary stamp taxes, if any, attributable
to the initial issuance of the Warrants or the securities comprising the Shares;
provided, however, the Company shall not be required to pay any tax which may be
payable in respect of any transfer of the Warrants or the securities comprising
the Shares.
SECTION 10 INDEMNIFICATION AND CONTRIBUTION.
10.1 INDEMNIFICATION BY COMPANY. In the event of the filing of any
Registration Statement with respect to the Warrant Shares pursuant to Section
(8) hereof, the Company agrees to indemnify and hold harmless the Warrantholder
or any holder of Warrant Shares and each person, if any, who controls the
Warrantholder or any holder of Warrant Shares within the meaning of the Act,
against any and all loss, claim, damage or liability, joint or several (which
shall, for all purposes of this Agreement include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which such
Warrantholder or any holder of Warrant Shares may become subject, under the Act
or otherwise, insofar as such loss, claim, damage, or liability (or action with
respect thereto) arises out of or is based upon (a) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus, the Effective Prospectus, or the Final
Prospectus or any amendment or supplement thereto; or (b) the omission or
alleged omission to state in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or the Final Prospectus or any amendment or
supplement thereto a material fact required to be stated therein or necessary to
make the statements therein not misleading; except that the Company shall not be
liable in any such case to the extent, but only to the extent, that any such
loss, claim, damage, or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by such Warrantholder or the holder of such Warrant Shares specifically
for use in the preparation of the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus or any amendment
or supplement thereto. This indemnity will be in addition to any liability
which the Company may otherwise have.
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<PAGE>
10.2 INDEMNIFICATION BY WARRANTHOLDERS. The Warrantholders and the
holders of Warrant Shares agree that they, severally, but not jointly, shall
indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any and all loss, claim, damage or liability,
joint or several (which shall, for all purposes of this Agreement include, but
not be limited to, all costs of defense and investigation and all attorneys'
fees), to which the Company may become subject under the Act or otherwise,
insofar as such loss, claim, damage, liability (or action in respect thereto)
arises out of or are based upon (a) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or the Final Prospectus or any
amendment or supplement thereto; or (b) the omission or alleged omission to
state in the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or the Final Prospectus or any amendment or supplement thereto a
material fact required to be stated therein or necessary to make the statements
therein not misleading; except that such indemnification shall be available in
each such case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in
reliance upon information and in conformity with written information furnished
to the Company by the Warrantholder or the holder of Warrant Shares specifically
for use in the preparation thereof. This indemnity will be in addition to any
liability which such Warrantholder or holder of Warrant Shares may otherwise
have.
10.3 RIGHT TO PROVIDE DEFENSE. Promptly after receipt by an
indemnified party under Section (10.1) or (10.2) above of written notice of the
commencement of any action, the indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under such section, notify
the indemnifying party in writing of the claim or the commencement of that
action; the failure to notify the indemnifying party shall not relieve it of any
liability which it may have to an indemnified party, except to the extent that
the indemnifying party did not otherwise have knowledge of the commencement of
the action and the indemnifying party's ability to defend against the action was
prejudiced by such failure. Such failure shall not relieve the indemnifying
party from any other liability which it may have to the indemnified party. If
any such claim or action shall be brought against an indemnified party, and it
shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice
from the indemnifying party to the indemnified party of its election to assume
the defense of such claim or action, the indemnifying party shall not be liable
to the indemnified party under such section for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; except that the
indemnified parties shall have the right to employ counsel to represent them and
the other Warrantholders or holders of Shares who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by such
persons against the Company under such section
19
<PAGE>
if, in reasonable judgment of counsel of the Company, it is advisable for those
Warrantholders or holders of Shares to be represented by separate counsel, and
in that event the fees and expenses of such separate counsel shall be paid by
the Company.
10.4 CONTRIBUTION. If the indemnification provided for in Sections
(10.1) and (10.2) of this Agreement is unavailable or insufficient to hold
harmless an indemnified party, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages, or liabilities referred to in Sections (10.1) or (10.2) above
(a) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Warrantholders on the other; or
(b) if the allocation provided by clause (a) above is not permitted by
applicable law, in such proportion as is appropriate to reflect the relative
benefits referred to in clause (a) above but also the relative fault of the
Company on the one hand and the Warrantholders on the other in connection with
the statements or omissions which resulted in such losses, claims, damages, or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Warrantholders shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and un-itemized expenses received by the Underwriters, in
each case as set forth in the table on the cover page of the Final Prospectus.
Relative fault shall be determined by reference to, among other things, whether
the untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or the Underwriter and the
parties' relative intent, knowledge, access to information, and opportunity to
correct or prevent such untrue statement or omission. For purposes of this
Section (10.4), the term "damages" shall include any counsel fees or other
expenses reasonably incurred by the Company or the Underwriters in connection
with investigating or defending any action or claim which is the subject of the
contribution provisions of this Section (10.4). No person adjudged 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.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it shall promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in Section (10.4) hereof).
SECTION 11 TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
This Warrant, the Warrant Securities, and all other securities issued or
issuable upon exercise of this Warrant, may not be offered, sold or transferred,
in whole or in part, except in compliance with the Act, and except in compliance
with all applicable state securities laws. The Company may cause substantially
the following legends, or their equivalents, to be set forth on each certificate
representing the Warrant Securities,
20
<PAGE>
or any other security issued or issuable upon exercise of this Warrant, not
theretofore distributed to the public or sold to underwriters, as defined by the
Act, for distribution to the public pursuant to Section 8 above:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT
IN COMPLIANCE WITH THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED."
(b) Any legend required by applicable state securities laws.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legends (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act of 1933, as amended (the "Act"), or the securities
represented thereby) shall also bear the above legends unless, in the opinion of
the Company's counsel, the securities represented thereby need no longer be
subject to such restrictions.
SECTION 12 FRACTIONAL SHARES.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of all or any part of this Warrant. With respect to
any fraction of a share of any security called for upon any exercise of this
Warrant, the Company shall pay to the Holder an amount in money equal to that
fraction multiplied by the Current Market Price of that share.
SECTION 13 NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER.
Nothing contained in this Agreement or in the Warrants shall be construed
as conferring upon the Warrantholder or its transferees any rights as a
stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect to any meeting of
stockholders for the election of directors of the Company or any other matter.
The Company covenants, however, that for so long as this Warrant is at least
partially unexercised, it will furnish any Holder of this Warrant with copies of
all reports and communications furnished to the shareholders of the Company. In
addition, if at any time prior to the expiration of the Warrants and prior to
their exercise, any one or more of the following events shall occur:
(a) any action which would require an adjustment pursuant to
Section (4.1) (except subsections (4.1(f)) and (4.1(i)) or (4.4); or
(b) a dissolution, liquidation, or winding up of the Company
(other than in connection with a consolidation, merger, or sale of its property,
assets, and business as an entirety or substantially as an entirety) shall be
proposed:
21
<PAGE>
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section (16) hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
stockholders entitled to vote on such proposed dissolution, liquidation, or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to mail or receive notice or
any defect therein shall not affect the validity of any action taken with
respect thereto.
SECTION 14 CHARGES DUE UPON EXERCISE.
The Company shall pay any and all issue or transfer taxes, including, but
not limited to, all federal or state taxes, that may be payable with respect to
the transfer of this Warrant or the issue or delivery of Warrant Securities upon
the exercise of this Warrant.
SECTION 15 WARRANT SECURITIES TO BE FULLY PAID.
The Company covenants that all Warrant Securities that may be issued and
delivered to a Holder of this Warrant upon the exercise of this Warrant and
payment of the Exercise Price will be, upon such delivery, validly and duly
issued, fully paid and nonassessable.
SECTION 16 NOTICES.
Any notice pursuant to this Agreement by the Company or by a
Warrantholder or a holder of Shares shall be in writing and shall be deemed to
have been duly given if delivered or mailed by certified mail, return receipt
requested:
i. If to a Warrantholder or a holder of Shares, addressed
to the address set forth above. address set forth above.
ii. If to the Company addressed to it at 7367 S. Revere
Parkway, #2C, Englewood, CO 80112-3931, Attention: President.
Each party may from time to time change the address to which notices to
it are to be delivered or mailed hereunder by notice in accordance herewith to
the other party.
SECTION 17 MERGER OR CONSOLIDATION OF THE COMPANY.
The Company will not merge or consolidate with or into any other
corporation or sell all or substantially all of its property to another
corporation, unless the provisions of Section (4.4) are complied with.
22
<PAGE>
SECTION 18 APPLICABLE LAW.
This Warrant shall be governed by and construed in accordance with the
laws of the State of Colorado, and courts located in Colorado shall have
exclusive jurisdiction over all disputes arising hereunder.
SECTION 19 ARBITRATION.
The Company and the Holder, and by receipt of this Warrant or any Warrant
Securities, all subsequent Holders or holders of Warrant Securities, agree to
submit all controversies, claims, disputes and matters of difference with
respect to this Warrant, including, without limitation, the application of this
Section (19) to arbitration in Denver, Colorado, according to the rules and
practices of the American Arbitration Association from time to time in force;
provided, however, that if such rules and practices conflict with the applicable
procedures of Colorado courts of general jurisdiction or any other provisions of
Colorado law then in force, those Colorado rules and provisions shall govern.
This agreement to arbitrate shall be specifically enforceable. Arbitration may
proceed in the absence of any party if notice of the proceeding has been given
to that party. The parties agree to abide by all awards rendered in any such
proceeding. These awards shall be final and binding on all parties to the
extent and in the manner provided by the rules of civil procedure enacted in
Colorado. All awards may be filed, as a basis of judgment and of the issuance
of execution for its collection, with the clerk of one or more courts, state or
federal, having jurisdiction over either the party against whom that award is
rendered or its property. No party shall be considered in default hereunder
during the pendency of arbitration proceedings relating to that default.
SECTION 20 ACCEPTANCE OF TERMS; SUCCESSORS.
By its acceptance of this Warrant Certificate, the Holder accepts and
agrees to comply with all of the terms and provisions hereof. All the covenants
and provisions of this Warrant Certificate by or for the benefit of the Company
or the Holder shall bind and inure to the benefit of their respective successors
and assigns hereunder.
SECTION 21 MISCELLANEOUS PROVISIONS.
(a) Subject to the terms and conditions contained herein, this
Warrant shall be binding on the Company and its successors and shall inure to
the benefit of the original Holder, its successors and assigns and all holders
of Warrant Securities and the exercise of this Warrant in full shall not
terminate the provisions of this Warrant as it relates to holders of Warrant
Securities.
(b) If the Company fails to perform any of its obligations
hereunder, it shall be liable to the Holder for all damages, costs and expenses
resulting from the failure, including, but not limited to, all reasonable
attorney's fees and disbursements.
23
<PAGE>
(c) This Warrant cannot be changed or terminated or any
performance or condition waived in whole or in part except by an agreement in
writing signed by the party against whom enforcement of the change, termination
or waiver is sought.
(d) If any provision of this Warrant shall be held to be invalid,
illegal or unenforceable, such provision shall be severed, enforced to the
extent possible, or modified in such a way as to make it enforceable, and the
invalidity, illegality or unenforceability shall not affect the remainder of
this Warrant.
(e) The Company agrees to execute such further agreements,
conveyances, certificates and other documents as may be reasonably requested by
the Holder to effectuate the intent and provisions of this Warrant.
24
<PAGE>
(f) Paragraph headings used in this Warrant are for convenience
only and shall not be taken or construed to define or limit any of the terms or
provisions of this Warrant. Unless otherwise provided, or unless the context
shall otherwise require, the use of the singular shall include the plural and
the use of any gender shall include all genders.
Dated
---------------------
TRAINING DEVICES INC.
By:
-----------------------------------
Ronald C. Ellington, CEO
25
<PAGE>
PURCHASE FORM
Dated _________, ____
The undersigned hereby irrevocably elects to exercise the Warrant
represented by this Warrant Certificate to the extent of purchasing Shares
of Training Devices Inc. and hereby tenders payment of the exercise price
thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
-------------------------------------------------------------------
(please type or print in block letters)
Address
----------------------------------------------------------------
-----------------------------------------------------------------------
ASSIGNMENT FORM
FOR VALUE RECEIVED, ____________________, hereby sells, assigns and
transfers unto
Name
-------------------------------------------------------------------
(Please type or print in block letters)
Address
----------------------------------------------------------------
the right to purchase Shares of MERGEFIELD Company < < Company > >
represented by this Warrant Certificate to the extent of Shares as to
which such right is exercisable and does hereby irrevocably constitute and
appoint attorney, to transfer the same on the books of the Company
with full power of substitution in the premises.
Signature Dated ,
------------------- ------------- ----
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS IT
APPEARS UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
...............................................................................
WARRANT CONVERSION EXERCISE FORM
Pursuant to Section 2.4 of the Warrant Agreement, the Holder hereby
irrevocably elects to convert Warrants with respect to Shares of the Company
into Shares of the Company. A conversion calculation is attached hereto
as Exhibit B-1.
The undersigned requests that certificates for such Shares be issued as
follows:
26
<PAGE>
Name:
------------------------------------------------------------------
Address:
---------------------------------------------------------------
Deliver to:
------------------------------------------------------------
and that a new Warrant Certificate for the balance remaining of the Warrants, if
any, subject to the Warrant be registered in the name of, and delivered to, the
undersigned at the address stated above.
Signature Dated ,
------------------- --------------- ----
27
<PAGE>
Exhibit B-1
CALCULATION OF WARRANT CONVERSION
<TABLE>
<CAPTION>
Converted Securities = Net Value
FMV
<S> <C> <C>
FMV = $
Net Value = Aggregate FMV - Aggregate
Exercise Price
= $ -
= $
Converted Shares =
Fractional Converted Shares = (1)
(1) TDI to pay for fractional
Shares in cash @ $ per Share.
</TABLE>
28
<PAGE>
PROMISSORY NOTE AND SECURITY AGREEMENT
PHOENIX, ARIZONA
$2,500,000 DECEMBER 23, 1999
1. FUNDAMENTAL PROVISIONS.
The following terms will be used as defined terms in this Promissory Note
and Security Agreement (as it may be amended, modified, extended and
renewed from time to time, the "Note"):
<TABLE>
<S> <C>
LENDER: Reginald D. Fowler
BORROWER: Training Devices International, Inc., a Colorado corporation
PRINCIPAL AMOUNT: Two Million Five Hundred Thousand Dollars
($2,500,000)
INTEREST RATE: Twelve percent (12%) per annum, fixed for the
Term
LOAN FEE: Two Hundred Fifty Thousand Dollars ($250,000)
payable to Lender on February 1, 2001
REVENUE PARTICIPATION PREMIUM: Seven Hundred Fifty Thousand Dollars ($750,000) payable to Lender,
commencing on February 1, 2001 in sixty (60) equal monthly
installments of $12,500
PRINCIPAL MATURITY DATE: February 1, 2001
COLLATERAL: Beech 1900D Level C Full Flight Simulator, having the Serial No. of
NEX-TDI-002, including all parts, accessories, sub-assemblies, visual
and motion systems and the right to use all related general
intangibles as are necessary to operate or sell the Simulator,
whether now owned or hereafter acquired, including but not limited
to, applications
Page 1 of 12 Lender /s/ RF / /s/ RE Borrower
----------------
<PAGE>
for patents, copyrights, trademarks, trade secrets, trade names, permits
and franchises, (the "Simulator"), a non-exclusive license of Simulator
System Software defined in Section 8 of this Note and all of Borrower's
general accounts receivable (as specified in an Intercreditor
Agreement between Lender and 1st Choice Bank).
PERMITTED EXCEPTIONS: (a) A security interest in Borrower's accounts receivable and the
software and the general intangibles with respect to the flight
simulator 1900D Level C Serial No. NEX-TDI-001 in favor of 1st Choice
Bank; (b) a first priority security interest in any visual and motion
system granted to the vendor of such system; or (c) a first priority
security interest in any subsequent simulators and the accounts
receivable arising from the sale or lease of a simulator or a
fractional ownership interest in a simulator (other than the
Simulator constituting the Collateral) granted to any party that
provides a loan for all or part of the cost to develop and
manufacture that particular simulator. It is understood by the
parties that Lender's security interest in the visual and motion
systems and such simulators and accounts receivable may in these
instances be subordinate to the first priority security interests,
and Lender will execute such documents as may be reasonably necessary
to subordinate Lender's security interest to those first priority
security interests.
BUSINESS DAY: Any day other than a Saturday, Sunday or legal holiday on which banks
in the State of Arizona are closed for business.
</TABLE>
2. PROMISE TO PAY.
For value received, Borrower promises to pay to the order of Lender, at
its address at 7100 W. Erie St., Chandler, Arizona 85226, or at such other
place as the Lender hereof may from time to time designate in writing, the
Principal Amount, or so much thereof as is actually disbursed pursuant
hereto, together with accrued interest from the date of disbursement on
the unpaid principal balance at the Interest Rate.
Page 2 of 12 Lender /s/ RF / /s/ RE Borrower
----------------
<PAGE>
3. LAWFUL MONEY.
Principal and interest are payable in lawful money of the United States of
America.
4. DISBURSAL AND LOAN PURPOSE
The Loan shall be disbursed according to Exhibit "A" on or about the dates
provided therein to Borrower for the purpose of building the Simulator.
These funds can be used for no other purpose.
5. PAYMENTS
Commencing on the first day of the month following the date of funding by
Lender and continuing on the same day each month thereafter, Borrower
shall make monthly installments of interest in the amounts as defined in
Exhibit "A", and herein incorporated as part of this Note. Said
installments shall not be subject to or limited to any source of funds of
Borrower.
On the Maturity Date, Borrower shall make a payment of the outstanding
principal balance, all accrued interest and the Loan Fee. In addition,
commencing on the Maturity Date and on the first day of each month
thereafter, Borrower shall make sixty (60) equal monthly payments of the
Revenue Participation Premium with the final payment of such Revenue
Participation Premium due and payable on January 1, 2006.
If any payment due hereunder is not received by Lender within five (5)
days after its due date, then, in addition to the other rights and
remedies of Lender, a per day late charge of Five Hundred Dollars
($500.00) will be charged to Borrower without notice. Such charge shall be
immediately due and payable.
6. PREPAYMENT.
Borrower may, at any time within the Note term, prepay this Note
(including the Loan Fee and the Revenue Participation Premium) in full or
in part without incurring any premium or penalty. This Note is not
considered paid in full until all principal, accrued interest, the Loan
Fee, the Revenue Participation Premium, and any other amounts due
hereunder have been paid in full. Borrower may prepay all or part of the
Revenue Participation Premium by paying to Lender an amount equal to the
present value of the Revenue Participation Premium at the time of
prepayment; in calculating the present value, Borrower shall use a
discount rate of seven percent (7%).
Page 3 of 12 Lender /s/ RF / /s/ RE Borrower
----------------
<PAGE>
7. SECURITY AGREEMENT.
As security for the payment and performance of this Note, the Loan and all
other present and future debts, obligations and liabilities of any nature
whatsoever of any one or more of Borrower to Lender, and all
modifications, renewals, replacements and extensions thereof (collectively
the "Obligations"), Borrower hereby assigns to Lender and grants to Lender
a first priority security interest in all of the Collateral subject only
to the Permitted Exceptions. Borrower will execute any security
agreements, collateral assignments, financing statements for filing and/or
recording and any other lien writings required by Lender to evidence,
create and perfect the liens and security interest of Lender. A carbon,
photographic or other reproduced copy of this Note and/or any financing
statement relating hereto shall be sufficient for filing and/or recording
as a financing statement.
Unless an Event of Default has occurred and is continuing, Lender's
security interest in the Collateral will be released in full, except for
its interest in Simulator accounts receivable, upon the Borrower's payment
of (1) $2,500,000 plus interest at 12% per annum accrued but unpaid to
Maturity Date and (2) the $250,000 Loan Fee. In addition, before or
concurrent with a third party's purchase of any fractional ownership
interest in the Simulator, Lender shall grant a release of such interest
from the Collateral upon Borrower's repayment of a percentage of the
Principal Amount and Loan fee that is equal to the percentage sold of the
Simulator. For example, Borrower would repay 1/7th of the Principal Amount
and Loan Fee if 1/7th fractional ownership interest in the Simulator was
sold. Lender shall continue to maintain a first priority security interest
in the accounts receivable generated by the sale of the fractional
ownership interest in the Simulator until the Revenue Participation
Premium is fully repaid.
Borrower agrees that any and all funds received from its Initial Public
Offering (the "IPO"), herein specified as the effective date of the IPO,
shall be used to remove any senior liens on the motion and visual systems.
Lender shall have no duty or obligation to protect, insure, collect or
realize upon the Collateral or preserve rights in it against prior
parties. Borrower releases Lender from, and shall indemnify Lender against
any liability for any act or omission relating to the Collateral, except
for any liability directly resulting from Lender's negligence or willful
misconduct, as determined in a final non-appealable judgment.
Borrower agrees as follows:
(a) Borrower (1) shall keep the Collateral free from all liens
other than the Permitted Exceptions, (2) shall defend the
Collateral against all claims and legal proceedings by persons
other than Lender, (3) shall pay and discharge when due all
taxes, levies and other charges upon the Collateral; (4) shall
not permit the Collateral to be used in violation of any policy
of insurance.
Page 4 of 12 Lender /s/ RF / /s/ RE Borrower
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(b) Borrower shall pay all expenses and, upon Lender's request,
execute all writings and take all other actions reasonably
deemed advisable by Lender to preserve the Collateral or to
establish and determine priority of perfection, continued
perfection or enforce Lender's interest in the Collateral.
(c) Lender may examine and conduct audits of the Collateral and
Borrower's records concerning it, wherever located, and make
copies of such records, at any time during normal business
hours with two days advance notice, and Borrower shall assist
Lender in so doing. Borrower shall keep accurate complete and
current records respecting the Collateral.
For so long as the Note is secured by the Collateral, Borrower hereby makes,
constitutes and appoints Lender the true and lawful attorney-in-fact of
Borrower, in the name, place and stead of Borrower, other otherwise upon the
occurrence of any Event of Default until the default is cured as defined in
Section 16.
(a) To take all actions and to execute, acknowledge, obtain and
deliver any and all writings necessary or deemed advisable by
Lender in order to exercise any rights of Borrower with respect to
the Collateral or to receive and enforce any payment or
performance due to Borrower with respect to the Collateral;
(b) To give any notices, instructions or other communications to any
Person or entity in connection with the Collateral;
(c) To demand and receive all performances due under or with respect
to the Collateral and to take all lawful steps to enforce such
performances and to compromise and settle any claim or cause of
action of Borrower arising from or related to the Collateral and
give acquittances and other discharges relating thereto; and
(d) To file any claim or proceeding or to take any other action, in
the name of Lender, Borrower or otherwise, to enforce performances
due under or related to the Collateral or to protect and preserve
the right, title and interest of Lender thereunder.
The foregoing power of attorney is a power coupled with an interest and shall be
irrevocable and unaffected by the disability of the principal so long as the
Note is secured by the Collateral. Lender shall have no obligation to exercise
any of the foregoing rights and powers in any event.
Page 5 of 12 Lender /s/ RF / /s/ RE Borrower
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8. SIMULATOR SYSTEM SOFTWARE AND INTELLECTUAL PROPERTIES.
Borrower hereby grants and conveys to Lender, a non-exclusive,
irrevocable, worldwide license to use Borrower's proprietary system
software that Borrower has developed to run and operate the Simulator (the
"System Software"), subject to the following:
(a) Except in an Event of Default, Lender may not convey
this license or otherwise transfer its interest in,
or grant to any third parties any interest in or
right to use the System Software.
Borrower shall indemnify and hold Lender, his successors and assigns,
harmless from and against any claims of third parties, which assert that
any of the System Software infringes a proprietary right of another party.
This license agreement shall be governed by, interpreted and construed
under, and enforceable in accordance with the laws of the State of
Colorado.
Borrower shall deposit with Lender two (2) full sets of all System Software
and documentation and instructions thereto, to be held by Lender as
Collateral and in accordance with the terms and conditions set forth in
Section 7 and herein this Section 8.
9. SIMULATOR AND SOFTWARE WARRANTIES.
This Note and Agreement shall not alter, modify, restrict or encroach upon
any warranties provided by Borrower.
10. INDEMNIFICATION.
Borrower hereby agrees to indemnify, hold harmless and to defend Lender,
his successors and assigns for any and all claims, actions, causes of
action arising out of or related to the Collateral herein, except that
Borrower shall have no indemnification obligations for claims, actions or
causes of action arising out of Lender's negligence or willful misconduct.
The amount payable under this indemnification provision shall be reduced
by the proceeds of applicable insurance coverage, if any, actually
received by Lender. Borrower shall not be liable for any settlement amount
in regard to such claims, actions or causes of action unless Borrower has
consented to the settlement, which consent shall not be unreasonably
withheld.
11. WAIVERS.
This Note and Agreement shall not alter, modify restrict or encroach upon
the obligations, responsibilities and requirements of the Borrower to
Lender.
Page 6 of 12 Lender /s/ RF / /s/ RE Borrower
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12. COMPROMISE OF CLAIMS.
No liability, fault or wrongdoing of any kind is hereby admitted by any
party hereto as a result of negotiating or executing this Note and
Agreement, including any and all statements and communications by the
parties, their attorneys or representatives.
13. SEVERABILITY.
Should any of the terms of this Note and Agreement or its application to
any person or circumstances become invalid or unenforceable to any extent,
the remainder of this Note and Agreement shall not be affected thereby,
and each term and provision hereof shall be valid and enforceable to the
fullest extent permitted by law.
14. BUSINESS RISK.
Borrower and Lender (by its acceptance of this Note) hereby affirm, agree
and acknowledge that because of the inherent business risk to Lender in
the financing involved in this transaction, the Interest Rate, the Loan
Fee and the Revenue Participation Premium provided in this Note constitute
a fair and reasonable return to Lender in light of such business risk.
15. INTEREST RATE LIMITATION.
Borrower hereby agrees to pay an effective rate of interest that is the
sum of the Interest Rate provided for herein, together with any additional
rate of interest resulting from any other charges of interest or in the
nature of interest paid or to be paid in connection with the Loan,
including, without limitation, the Loan Fee, the Revenue Participation
Premium and any other fees to be paid by Borrower pursuant to the
provisions of the Note. Lender and Borrower agree that none of the terms
and provisions contained herein shall be construed to create a contract
for the use, forbearance or detention of money requiring payment of
interest at a rate in excess of the maximum interest rate permitted to be
charged by the laws of the State of Arizona. In such event, if any holder
of this Note shall collect monies which are deemed to constitute interest
that would otherwise increase the effective interest rate on this Note to
a rate in excess of the maximum rate permitted to be charged by the laws
of the State of Arizona, all such sums deemed to constitute interest in
excess of the such maximum rate shall, at the option of the holder, be
credited to the payment of other amounts payable under this Note or
returned to Borrower.
16. EVENT OF DEFAULT.
Occurrence of one or more of the following shall constitute an Event of
Default under this Note:
Page 7 of 12 Lender /s/ RF / /s/ RE Borrower
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<PAGE>
(a) Any failure of the Borrower to pay Lender any amounts due under
this Note within ten days of the due date without notification, or in
the case of amounts due on the Maturity Date, the failure of Borrower
to pay Lender those amounts on or before ninety (90) days after Federal
Aviation Administration (the "FAA") qualification of the Simulator; or
(b) Any failure or neglect of the Borrower to perform or observe any of
the terms, provisions, conditions or covenants of this Note within ten
(10) days of Borrower's receipt of written notice of each non-monetary
default; or
(c) If Borrower shall become insolvent; shall make an assignment for
the benefit of creditors; shall fail generally to pay its debts as they
become due; shall have a receiver, trustee, custodian or conservator
appointed with respect to all or part of its assets; or if a petition
for relief under any chapter of the federal Bankruptcy Code (or any
similar debtor relief laws to which the parties may be subject) is
filed by or against any Borrower and, if an involuntary petition, such
petition is not dismissed within sixty (60) days of filing; or
(d) If any tax lien or levy, attachment, garnishment, replevin,
execution, or other statutory or judicial lien is filed, levied or
claimed against all or any portion of or any interest in the Collateral
and such claim or lien is not discharged, satisfied or bonded over to
Lender's satisfaction before the earlier of: (1) forty-five (45) days
thereafter; and (2) not less than five (5) Business Days prior to any
sale of any portion of or interest in the collateral pursuant thereto;
or
(e) If Borrower shall fail to provide and maintain the insurance as
provided in Section 17 of this Note.
17. REMEDIES.
If any Event of Default occurs or if any Obligation matures by its terms
and is not then fully paid within any applicable grace period as specified
in Section 16, Lender may, without any further notice (except as may be
required by specific applicable laws such as those requiring notices of
intended dispositions of certain Collateral) do one or more of the
following in such order and manner as Lender, in its sole discretion, may
elect to:
(a) Cause the entire then unpaid amount of the Obligations or
any portion(s) thereof to be and become immediately due
and payable; or
(b) Exercise any or all of the remedies of a secured party
under the Arizona (and/or any other relevant state(s)
Uniform Commercial Code (the "UCC") with respect to the
Collateral. If Lender should proceed to dispose of or
otherwise realize upon any such Collateral in
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----------------
<PAGE>
accordance with the provisions of the UCC, unless the
Collateral is perishable or threatens to decline
speedily in value, seven (7) days notice by Lender
to Borrower or any other "debtor" described in the
UCC shall be deemed to be commercially reasonable
notice under any provision of the UCC requiring notice;
or
(c) Avail itself of any other relief to which Lender may be
legally or equitably entitled.
18. INSURANCE.
For so long as the Collateral secures this Note, Borrower shall name
Lender as "Additionally Named Insured" on Borrower's general liability
insurance policy of not less than $3,000,000 and Borrower's umbrella
liability policy of not less than $5,000,000 and shall provide Lender with
a binder within ten (10) days of execution of this Note.
19. WAIVER.
Borrower, endorsers, guarantors, and sureties of this Note hereby waive
diligence, demand for payment, presentment for payment, protest, notice of
protest, and notice of dishonor, and all other notices or demands of any
kind (except notices specifically provided for herein).
20. CHANGE, DISCHARGE, TERMINATION, OR WAIVER.
No provision of this Note may be changed, discharged, terminated, or
waived except in a writing signed by the party against whom enforcement of
the change, discharge, termination or waiver is sought. No failure on the
part of the Lender to exercise and no delay by the Lender in exercising
any right or remedy under this Note or under the law shall operate as a
waiver thereof.
21. ATTORNEYS' FEES.
If this Note is not paid when due or if any Event of Default occurs,
Borrower promises to pay all costs of enforcement and collection and
preparation therefor, including but not limited to, reasonable attorneys'
fees, whether or not any action or proceeding is brought to enforce the
provisions hereof.
22. CHOICE OF LAW.
This note shall be governed by and construed in accordance with the laws
of the State of Arizona without giving effect to conflict of laws
principles.
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<PAGE>
23. BORROWER WARRANTIES TO LENDER
Borrower warrants to Lender that his Note does not violate any Corporate
Bylaws of Borrower or Securities and Exchange Regulations of Disclosures,
and Borrower shall provide to Lender certified copies of Corporate
Resolutions attached hereto as Exhibit "B" and Borrower shall indemnify
and defend Lender of this Note against any and all encumbrances,
attachments and adversaries of Lender's positional rights of security
aforementioned herein.
24. ENTIRE AGREEMENT.
This Note and Agreement constitutes the entire agreement between the
parties relating to the subject hereof, and any prior agreements
pertaining thereto, whether oral or written, have been merged with and
integrated into this Note.
25. NOTICES.
Any notices which a party desires or is required to give hereunder shall
be in writing and shall be deemed given when delivered personally to each
party, or three days after deposited in the United States mails, postage
prepaid, either registered or certified, return receipt requested, to the
parties at the following addresses:
Lender: REGINALD D. FOWLER
7100 West Erie Street
Chandler, AZ 85228
Borrower: TRAINING DEVICES INTERNATIONAL, INC.
Attention President
7367 South Revere Parkway, Building 2C
Englewood, CO 80112
BORROWER
TRAINING DEVICES INTERNATIONAL, INC.
By: /s/ Ronald C. Ellington
----------------------------------
Ronald C. Ellington, Chairman and
Chief Executive Officer
Page 10 of 12 Lender /s/ RF / /s/ RE Borrower
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<PAGE>
ATTACHMENT A
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
FOWLER AGREEMENT
- ---------------------------------------------------------------------------------
CASH FLOW DATA
- ---------------------------------------------------------------------------------
EVENT START DATE AMOUNT NUMBER PERIOD END DATE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Loan 01/01/2000 1,000,000.00 1
3 Payment 02/1/2000 10,000.00 2 Monthly 03/01/2000
4 Loan 03/1/2000 500,000.00 1
5 Payment 04/1/2000 15,000.00 3 Monthly 06/01/2000
6 Loan 06/1/2000 500,000.00 1
7 Payment 07/1/2000 20,000.00 3 Monthly 09/01/2000
8 Loan 09/1/2000 500,000.00 1
9 Payment 10/1/2000 25,000.00 5 Monthly 02/01/2001
10 Payment 02/01/2001 2,750,000.00 1
11 Payment 02/01/2001 12,500.00 60 Monthly 01/01/2006
</TABLE>
Page 11 of 12 Lender /s/ RF / /s/ RE Borrower
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<PAGE>
CONSENT CERTIFICATE
The undersigned hereby certify as follows:
1. They are all of the directors of Training Devices International, Inc., a
Colorado corporation (hereinafter called the "Company"), entitled to vote
with respect to the subject matter hereof.
2. The following resolutions are consented to by the undersigned as such
directors as and for their unanimous act and the act of the Company as
provided in and in accordance with the provisions of the Colorado Business
Corporation Act:
WHEREAS, the Company wishes to borrow Two Million Five Hundred
Thousand Dollars ($2,500,000.00) from Reginald D. Fowler and the
officers of the Company are negotiating agreements for this purpose;
now therefore be it
RESOLVED, that the President of the Company, the Chief Executive
Officer of the Company and any Vice President of the company, and
each of them, are hereby authorized to execute and deliver on behalf
of the Company the promissory note and security agreement (a draft
of which is attached to this Certificate) for a total indebtedness of
Two Million five Hundred Thousand Dollars ($2,500,000.00), plus
Interest, Loan Fee, and Revenue Participation Premium to Reginald D.
Fowler, with such terms and conditions and with such changes to the
draft documents as the officer executing the same shall approve
(whose execution shall conclusively evidence that approval);
RESOLVED, that the officers of the Company are hereby authorized and
directed to take such actions and execute such documents as may be
necessary (1) to effectuate the foregoing resolutions, (2) to
consummate the transactions contemplated by the above-described loan
documents, and (3) to perform and comply with the terms and
conditions of the final above-described loan documents.
3. This Certificate shall be deemed to be fully executed and delivered when
each of the undersigned has executed at least one counterpart, but not
necessarily the same counterpart, hereof.
4. The undersigned have executed this Certificate as of October 25, 1999.
/s/ Ronald C. Ellington
-------------------------------
Ronald C. Ellington, Director
/s/ Bruce S. Betschart
-------------------------------
Bruce S. Betschart, Director
/s/ Robert E. Sawyer, Jr.
-------------------------------
Robert E. Sawyer, Jr., Director
/s/ Leonard Hawkins
------------------------------
Leonard Hawkins, Director
Page 12 of 12 Lender /s/ RF / /s/ RE Borrower
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<PAGE>
FINAL CONTRACT
Revision 03, November 17, 1999
between
TRAINING DEVICES INTERNATIONAL INC.
7367 S.REVERE PARKWAY
BLDG. 2C
ENGLEWOOD, COLORADO 80112-3931
UNITED STATES OF AMERICA
- hereinafter referred to as "TDI"
and
HYDRAUDYNE SYSTEMS & ENGINEERING B.V.
KRUISBROEKSESTRAAT 1, P.O. BOX 32
5280 AA BOXTEL
THE NETHERLANDS
- hereinafter referred to as "HYDRAUDYNE"
CONCERNING THE MANUFACTURE AND DELIVERY OF
TWO (2) LEVEL C/D MOTION SYSTEMS FOR THE
FULL FLIGHT SIMULATOR PROGRAM
OF BEECH 1900 SIMULATORS
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. EXPLANATION OF TERMS...................................................4
2. SUBJECT MATTER OF THIS CONTRACT........................................4
3. TIME SCHEDULE..........................................................5
4. DEFAULT OF DELIVERY / DELAY............................................5
5. PLACE OF DESTINATION - INSTRUCTIONS FOR SHIPMENT / TITLE AND RISK......6
6. LIABILITY INSURANCE....................................................6
7. WARRANTY...............................................................7
8. PATENT RIGHTS / OWNERSHIP..............................................7
9. PRICES.................................................................7
10. PAYMENT................................................................8
11. RIGHTS OF USE CONCERNING USER DOCUMENTATION............................8
12. RIGHTS OF USE CONCERNING COMPUTER SOFTWARE.............................9
13. EXTRAORDINARY TERMINATION OF CONTRACT, SETTLEMENT OF RESIDUAL CLAIMS...9
14. SPARES.................................................................9
15. QUALITY CONTROL.......................................................10
16. QUALITY INSPECTION, FACTORY TESTING AND ACCEPTANCE....................10
17. GENERAL ALTERATIONS OF THE CONTRACT...................................11
18. PARTIAL INVALIDITY....................................................11
19. VENUE OF JURISDICTION.................................................11
20. GENERAL PROVISIONS....................................................11
21. CONTRACT VALIDITY.....................................................12
</TABLE>
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<PAGE>
LIST OF APPENDICES
Appendix 1 Scope of Supply
Appendix 2 Supply Prices
Appendix 3 Hour Rates Hydraudyne Engineers
Appendix 4 Milestone Schedule Motion System 1 and 2
Appendix 5 Technical Specification HSE-6-MS-60-C-5D
Appendix 6 Master Performance Bond document
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<PAGE>
1. EXPLANATION OF TERMS
In this contract, the following abbreviations shall have the meanings shown
hereafter. Other abbreviations may be introduced and defined in the relevant
sections of this contract.
ABBREVIATION EXPLANATION
End User End user or owner of simulator
TDI Prime contractor, namely:
Training Devices International Inc.
7367 S. Revere Parkway
Bldg. 2C
Englewood, Colorado 80112-3931
United States of America
HYDRAUDYNE Subcontractor of TDI, namely:
Hydraudyne Systems & Engineering B.V.,
Kruisbroeksestraat 1, P.O. Box 32,
5280 AA Boxtel, The Netherlands
RFT Shall mean the simulator and its subsystems are
Ready For Training as deemed by TDI.
2. SUBJECT MATTER OF THIS CONTRACT
2.1. HYDRAUDYNE shall be fully and exclusively responsible to TDI for the
correct execution of this contract with respect to the deliverable items
(material and services) to be provided hereunder on the commercial,
technical, time schedule and quality assurance levels in accordance with
the provisions of this contract and its appendices.
2.2. HYDRAUDYNE as a specialist company and having knowledge of the intended
use of the subject matter of this contract undertakes to provide the
following services and to supply the following "Works".
2.2.1. Manufacture, installation, commissioning and tuning of the first
delivered motion system. Manufacture, and installation assistance of the
second motion system.
2.2.2. Delivery of Documentation to the extent described in Appendix 1.
2.2.3. FAA certification and tuning support of the first motion system as
described in Appendix 1, item 13.
2.2.4. Training Courses as described in Appendix 1.
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2.3. The minimum performance of the system shall conform to Technical
Specification HSE-6-MS-60-C-5D, Appendix 5 with an enhanced bandwidth
(frequency response) of 0.1-4 hertz in heave mode, not to exceed
45 DEG., and FAA AC 120-40B motion criteria for level C/D. Design changes
are not included in the supply price and have not been taken in
consideration in the mile stone schedule. Design changes may result in
an increase of the supply price and/or a delay in delivery time.
3. TIME SCHEDULE
3.1. HYDRAUDYNE shall keep the delivery dates as per Appendix 4 (Milestone
Schedule) for the services and supplies as described in Appendix 1.
4. DEFAULT OF DELIVERY / DELAY
4.1. In the event that HYDRAUDYNE is delayed in meeting any date specified
in the Milestone Schedule, HYDRAUDYNE shall promptly provide to TDI
possible work-around plans to minimize the delay on the Program. Such
plans may include the assignment of additional personnel, increase in
required hours of work, acceleration of effort on parallel tasks, and
other planned efforts that are designed to overcome the effect of the
delay.
4.2. In the event that HYDRAUDYNE anticipates that it will be or actually is
delayed by a cause that is the result or fault of HYDRAUDYNE from
meeting any date specified in the Milestone Schedule, HYDRAUDYNE shall
promptly provide to TDI possible recovery plans to minimize the delay.
4.3. In the event that dates specified in the Milestone Schedule is not
observed by sole fault of HYDRAUDYNE or its supplies, HYDRAUDYNE shall
pay TDI a penalty of 0.5% of the value of the delayed delivery or
service, per week of delay. If the delay causes the RFT date to be
delayed, HYDRAUDYNE will pay to TDI $ 500/day until the delay is
remedied. If any delay exceeds sixty (60) days, HYDRAUDYNE will be in
default. The sum of all penalties shall not exceed 5% of the contract
value. If the penalty cap is reached, HYDRAUDYNE will be in default.
A grace period of one week is extended at the option of TDI only if the
delay will not effect RFT.
4.4. The payment of the contract penalty shall not release HYDRAUDYNE from its
obligations hereunder.
4.5. HYDRAUDYNE shall not be liable for loss or damage resulting in any
delay or failure to deliver or complete the works within the time
specified as a result of acts of God, any civil or military authority,
civil disturbances, strikes, fires, floods, other catastrophes,
embargoes, any governmental restrictions and any circumstances beyond
HYDRAUDYNE' control except delays by its suppliers. In case of such
events, HYDRAUDYNE shall, within 7 working days after such an event,
notify TDI of the consequences in writing.
Where HYDRAUDYNE is prevented from or delayed in performing its
obligations under this contract by any event under this clause, HYDRAUDYNE
shall be given such an extension of time as may be reasonable having
regard to the duration of the mentioned events under this clause, the
effect of these events on HYDRAUDYNE' operations and HYDRAUDYNE' duty to
mitigate the
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<PAGE>
consequences of any delay caused by this clause, however, such
extension of time shall not exceed the period of 3 (three) months (in
aggregate) following the date of the incident.
4.7. If HYDRAUDYNE is in default as set forth above, TDI may, in addition to
any other remedies available under this contract or applicable law
(whether law or in equity), terminate this contract upon written notice to
HYDRAUDYNE.
4.8. In the event of termination, TDI will return all HYDRAUDYNE furnished
supplies to HYDRAUDYNE and HYDRAUDYNE shall return all monies paid by TDI
to HYDRAUDYNE.
4.9. Any claims under this clause must be received by HYDRAUDYNE in writing,
within seven (7) days after each event.
4.10. The same conditions as mentioned in clause 4.1 - 4.2 and 4.5 - 4.9 under
this contract will apply in the favor of HYDRAUDYNE in the case that delay
is caused by TDI or the end user.
5. PLACE OF DESTINATION - INSTRUCTIONS FOR SHIPMENT / TITLE AND RISK
5.1. The place of destination for the items of delivery as stated in Appendix 1
shall be the following address:
Training Devices International Inc.
7367 S.Revere Parkway
Bldg. 2C
Englewood, Colorado 80112-3931
United States of America
5.2. Title of HYDRAUDYNE' scope of supply will pass from HYDRAUDYNE to TDI upon
RFT and after all contractual payments described in paragraph 10 have been
performed.
5.3. Risks of loss of HYDRAUDYNE' scope of supply will be transferred to TDI
after installation by HYDRAUDYNE at TDI premises.
6. LIABILITY INSURANCE
6.1 Insurance Provisions
Hydraudyne shall hold TDI harmless against all claims resulting from our
product and all legal liabilities towards third parties.
6.2 Certificates of Insurance
Within thirty (30) days after the date of this Contract, Hydraudyne shall
provide TDI a certificate of their legal and product liability insurance.
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<PAGE>
7. WARRANTY
7.1. HYDRAUDYNE as a specialist company and having knowledge of the purpose
of the subject matter of this contract, shall assume the responsibility
for all of its contractual obligations as a whole and warrant with
respect to the subject matter of this contract:
a) conformity to the contents of the contractual technical documents
b) completeness and correctness of the documentation to be delivered
c) quality of material
d) expert and good workmanship
7.2. HYDRAUDYNE shall be promptly notified in writing by TDI during the
warranty period of any defect or non-conformance in the parts of the
products delivered under this contract.
7.3. Hydraudyne provides warranty for a period of 12 months after RFT or 18
months after installation at TDI, which ever comes first.
7.4. Provided that an examination of defective or non-conforming articles
(under mutual agreement) discloses that any defect or non-conformance
was caused by negligency, improper use or installation, normal wear and
tear, accident, unauthorized repair or alteration by someone other than
HYDRAUDYNE, the warranty obligations shall not apply.
7.5. In those cases where, as a consequence of a warranty claim, HYDRAUDYNE
shall have to furnish new components, the warranty shall also include
the delivery of new replacement material required, free of any charge.
The functional compatibility of the replacement material to be adapted
or to be newly delivered by HYDRAUDYNE shall be ensured.
7.6. HYDRAUDYNE shall ensure that all parts including recommended spares be
available (form, fit and function) for the next 10 years.
8. PATENT RIGHTS / OWNERSHIP
8.1. HYDRAUDYNE hereby declares that the results of the work are not
encumbered by rights of third parties, and shall release TDI from any
claims made by third parties, if the results of the work infringe the
proprietary rights of third parties.
9. PRICES
9.1. The following firm price is agreed for the services and supplies for 2
(two) motion systems as described in Appendix 1, provided by HYDRAUDYNE
hereunder:
US$ 1,000,000.-
Excluding any taxes duties and other fees which may be applicable
outside of the Netherlands.
Excluding the options as mentioned in Appendix 2.
The price mentioned above is a firm fixed price motion system #1 CIF
TDI, Englewood, Colorado, USA, motion system #CIF, (Incoterms
1990) Boxtel, including the services at Site, as
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<PAGE>
described in Appendix 1. HYDRAUDYNE shall arrange for the shipment of
motion system #2 from Boxtel to TDI and invoice TDI at cost for the
shipment.
9.2. In the event that, upon request by TDI, HYDRAUDYNE is called upon to
provide assistance, outside the scope of this Contract, the rate for
such services shall be as per Appendix 3 (Hour Rates).
10. PAYMENT
The parties agree on the following terms of payment:
10.1. Payment schedule
The following payment schedule is agreed for the price as mentioned in
paragraph 9.1:
1) 15% of total Contract value as advance payment upon Contract
Award
2) 45% of total Contract value at RFT system 1.
3) 40% of total Contract value at RFT system 2.
10.2. Each milestone payment shall only be due if all conditions of the
preceding milestones have been fulfilled by HYDRAUDYNE. HYDRAUDYNE will
provide a Mannesmann Performance Bond of 5% of each system RFT, valid
from the moment that payment is received by HYDRAUDYNE in its free
disposal with a validity of six (6) months but not longer than one (1)
year after installation of each system after which the Performance
Bond will be null and void. See Appendix 6 for the Performance Bond
Master document.
10.3. All payments shall be made net 30 days after invoice date by wire
transfer
11. RIGHTS OF USE CONCERNING USER DOCUMENTATION
11.1 HYDRAUDYNE declares that it has no knowledge whatsoever concerning third
parties' adverse proprietary rights concerning the user documentation.
11.2 Documentation provided will be all that is necessary for the operation,
calibration, maintenance, repair, tuning, and modification of the motion
system.
11.3 HYDRAUDYNE grants TDI the right to repackage and redeliver the user
documentation to the end user.
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<PAGE>
12. RIGHTS OF USE CONCERNING COMPUTER SOFTWARE
12.1. The software provided will be all that is necessary for the operation,
calibration, maintenance, repair, tuning, and modification of the motion
system. TDI recognizes that HYDRAUDYNE' software is proprietary to
HYDRAUDYNE and title remains in HYDRAUDYNE.
13. EXTRAORDINARY TERMINATION OF CONTRACT, SETTLEMENT OF RESIDUAL CLAIMS
13.1. The parties hereunder agree to the right to an extraordinary termination
with settlement of residual claims.
13.2. In the case of a rescission of this contract, by TDI, through no fault
of HYDRAUDYNE, wholly or in part, HYDRAUDYNE is entitled to a
compensation amounting to the cost incurred by the performance of work
or to the expenses incurred including lost profits and reasonable
termination costs.
13.3. Any claims raised by HYDRAUDYNE shall be justified and documented. In no
case the payments will exceed the amount to which HYDRAUDYNE would have
been entitled after fulfillment of the entire contract.
14. SPARES
14.1. Hydraudyne shall provide to TDI, within 90 days of Contract award,
recommendations for spares required to support the supplies delivered
by HYDRAUDYNE, in the form of a recommended spares list. This list
shall contain the following information for each recommended spare:
a. vendor part description
b. vendor name
c. vendor part name
d. level of repair (TDI/Vendor/Expendable)
e. vendor spare recommendations
f. spare quantity recommendation
- --------------------------------------------------------------------------------
Hydraudyne Systems & Engineering B.V. Page 9
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<PAGE>
15. QUALITY CONTROL
15.1 HYDRAUDYNE undertakes to maintain a quality assurance system for this
project in accordance with ISO 9001, latest issue.
15.2. TDI, at own expense, shall be entitled to audit HYDRAUDYNE' quality
system on a non-interference basis on site, at any time upon
notification no less than ten (10) working days in advance.
15.3. HYDRAUDYNE shall maintain adequate record throughout all stages of
contract performance of inspections, tests, and other control processes.
15.4. HYDRAUDYNE undertakes to establish similar quality assurance measures
with its subcontractors.
16. QUALITY INSPECTION, FACTORY TESTING AND ACCEPTANCE
16.1. The Quality Assurance of the end user and the Quality Assurance of the
representatives of TDI respectively shall be authorized to audit the
quality assurance measures related to the subject matter of this
contract in accordance with the Quality Assurance Plan of HYDRAUDYNE.
Quality Assurance Audits shall be held at the HYDRAUDYNE facility on a
non-interference basis. When possible, notification of Quality Audits
(inspections) by TDI shall be provided to HYDRAUDYNE 10 (ten) working
days prior to the scheduled inspection.
16.2. Prior to delivery to TDI, HYDRAUDYNE shall perform a Factory
Test (FT) of the subassemblies subject matter of this
contract. All tests will be carried out in accordance with a Standard
Factory Test Plan (FTP) for purposes of conducting the FT at
HYDRAUDYNE on the date which shall be agreed between the parties no
less than two (2) weeks prior to the commencement of FT.
16.3. HYDRAUDYNE shall deliver the FTP to TDI for review and comment at least
six (6) weeks prior to the scheduled date of the first FT. Failure of
TDI to respond with acceptance or rejection (including complete details
pertaining to the rejection) within ten (10) working days shall be
considered deemed acceptance of the FTP.
16.4. The Quality Assurance representatives of TDI shall be entitled to attend
the FT performed by HYDRAUDYNE. All costs incurred by TDI (e.g. travel
& living expenses, TDI labor) shall be to the account of TDI.
16.5. With completion of the FT, TDI and HYDRAUDYNE together shall
establish a factory test report with a list of all outstanding
points. This list shall show all deficiencies identified during the
testing, if any, and a reasonable schedule for correction of the
deficiencies. The factory test report shall be signed by both parties
prior to departure. HYDRAUDYNE then immediately shall start to
rectify the defects stated in the factory test report.
16.6 HYDRAUDYNE shall notify TDI, a minimum of fourteen (14) days, in
advance of the time when the Factory Test of the subassemblies of the
subject matter of this contract shall be carried out.
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<PAGE>
16.7 With respect to services performed by HYDRAUDYNE at TDI's facility,
TDI shall inspect and test such services, and related products,
following the completion of the work and shall sign a certificate of
final acceptance before the departure of HYDRAUDYNE personnel from
TDI's facility. In the event that testing and inspection identifies
deficiencies or failure of the services and related products,
HYDRAUDYNE personnel, prior to departure, shall rectify or submit a
plan for rectification of said items within a mtutually agreed period
of time.
17. GENERAL ALTERATIONS OF THE CONTRACT
17.1. Alterations of or supplements to this contract shall be valid only if
agreed upon between HYDRAUDYNE AND TDI in the form of written amendments
to this contract, countersigned by authorized representatives of the
parties.
18. PARTIAL INVALIDITY
18.1. In the event that it is held by a court of law or other lawful
authority of competent jurisdiction that any provision of this
contract or part thereof is void, illegal, invalid or unenforceable
then such provision or part shall be deemed stricken, and the
remaining provisions shall be deemed savable and remain valid, in
full force and effect. In such case the parties to this contract
shall stipulate provisions having a commercial content as similar as
possible to the invalid provisions.
19. VENUE OF JURISDICTION
19.1 The parties to this contract shall endeavor to settle any disputes
arising therefrom in a spirit of good faith and mutual understanding. In
case of failure to settle such disputes, then for both parties to this
contract the sole venue of jurisdiction for all disputes arising
directly or indirectly from this contract shall be the State of
Colorado, USA.
20. GENERAL PROVISIONS
20.1. In the event of any inconsistency between the documents which form a
part of this contract, the following priority, in order of descending
authority, will apply:
1. Contract
2. Technical Contract Specification
3. Milestone Schedule
These documents shall be part of this contract.
- --------------------------------------------------------------------------------
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<PAGE>
21. CONTRACT VALIDITY
21.1. This document together with all attachments referenced in any ensuing
contract, constitutes the entire agreement between the parties
relating to the sale of products or services and supersedes all
previous communications, representations, or agreements, either oral
or written, with respect to the subject matter hereof, and no
representations or statements of any kind made by any representative
of the parties which are not stated herein, shall be binding to the
parties.
21.2. No addition to or modifications of any provision of any contract shall
be binding on the parties unless made in writing and signed by a duly
authorized representative of the parties.
Accepted: X /s/ Peter Waasdorp Date: 22-11-99
---------------------------- --------------
Name: Peter Waasdorp
Title: Manger Contracts & Finance
Hydraudyne Systems & Engineering, BV
Boxtel, The Netherlands
Accepted: X Date:
---------------------------- --------------
Name: Bruce Betschart
Title: President
Training Device International Inc.
Englewood, Colorado,
United States of America
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Final Contract TDI - Hydraudyne Rev.03 17/11/99
<PAGE>
APPENDIX 1
Scope of Supply
(3 pages)
SCOPE OF SUPPLY FOR 2 MOTION SYSTEMS
The delivery of two motion systems, type HSE-6-MS-60-C-5D, consists of the
following sub-systems :
01. 2X MOTION BASE ASSEMBLY, each consisting of:
6x 60 inch stroke (1524 mm) Hydraulic Motion Actuators
3x Double Universal Upper Joint Units
3x Double Universal Lower Joint Units
3x Floor Mounting Pads
02. 2X ACCUMULATOR & FILTER STATIONS, each consisting of:
3x Subassemblies for two Motion Actuators each consisting of:
1x High pressure accumulators
2x High pressure filters
2x Return line accumulators
03. 2X HYDRAULIC POWER UNIT, each consisting of:
1x Hydraulic fluid reservoir
2x Hydraulic pumps for the main flow
1x Hydraulic pump for cooling and circulation
1x Power Unit Control Cabinet (PUCC) and maintenance control panel
1x Hydraulic Fluid Conditioning Unit with water cooler
1x First filling of system
1x Provisions for a control loading pump set
04. 2X MOTION CONTROL CABINET (MCC), each consisting of:
1x Digital drive electronics:
- Motion Computer with motion maintenance and actuator control loop
software
- Plug-in cards for digital and analog I/O
- Ethernet interface between host computer and motion control computer
1x Inputs for customer safety interlocks
1x Inputs and outputs for Access Ramp control
1x Uninterruptable Power Supply (UPS)
1x Motion system control Panel
1x Motion Control Cabinet (MCC) containing the System Electronics.
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<PAGE>
05. 2X SET OF INTERCONNECTING HOSES, each consisting of:
3x Interconnecting hoses between Hydraulic Power Unit
and Accumulator Filter Stations: 70 ft Motion System #1, 85 ft
Motion System #2
6x Interconnecting hoses (length 10 ft) between Accumulator Filter
Stations and Motion Servo Actuators
06. 2X SET OF INTERCONNECTING CABLING, each consisting of:
- Cabling between HPU Motion Control Cabinet, length approx. 100 ft.
- Cabling between Motion Cabinet and Motion Base, length approx. 65 ft.
- Position transducer cabling between Motion Control Cabinet and Upper
Joint Units, length approx. 100 ft.
07. PROJECT ENGINEERING AND MANAGEMENT.
- Sub-assembly test of actuators, hydraulic power unit and electronics
- Factory Test of all sub-systems
- Logistic support
08. QUALITY ASSURANCE AND INSPECTIONS ACCORDING ISO 9001 CERTIFICATION
09. THREE (3) SETS OF MANUALS, DOCUMENTATION AND DRAWINGS.
- Operation manual, with start-up and shut-down procedures
- Maintenance manual, with inspection schemes
- Parts lists with reference to hydraulic and electrical schemes
- Interface Control Document
The ICD will provide all mechanical, electrical and environmental
interfaces.
- Main items parts list
- Proposed spare parts list
10. PACKING AND SHIPPING.
- Packing and shipping CIF - TDI, Englewood, Colorado, USA - System #1,
packing Hydraudyne, Boxtel, The Netherlands - Systems #2.
11. ASSEMBLY AND INSTALLATION ON SITE.
The first motion system to be delivered at TDI will be assembled by
Hydraudyne service engineers including travel, board and lodging, for
which assistance is required of two (2) TDI mechanical engineers for
hoisting, lifting and drilling activities. Assembly includes the
hydraulic power supply and the electronic control system.
One Hydraudyne service engineer will assist the assembly of the second
motion system to be delivered at TDI. Assembly and installation assistance
is based on ten (10) working days (Monday till Friday), for one (1)
Hydraudyne service engineer, including travel, boarding and lodging.
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<PAGE>
12. COMMISSIONING, FINE TUNING AND MAINTENANCE & OPERATION COURSE.
After completion of the assembly of the first simulator, Hydraudyne system
engineers will commission the complete motion system. During commissioning
and fine-tuning the complete motion system will be tested with the full
payload installed. Activities included:
- Testing of the motion system functionality
- Checking of the complete system (hydraulics, electronics, mechanics and
software)
- Fine tuning of the motion performances, in relation to the applicable
simulated aircraft type
During the first delivery a maintenance and operation course for
maintenance employees and operators is included with the commissioning of
the motion system. During commissioning and fine-tuning Hydraudyne will
give an operation course in practice, a one-day course in a classroom and
a one-day maintenance course.
Commissioning and fine-tuning is based on five (5) working days (Monday
till Friday), for one (1) Hydraudyne systems engineer, including travel,
boarding and lodging.
13. FAA CERTIFICATION ASSISTANCE
For FAA Level C/D purposes. Hydraudyne provides TDI, at the time of
initial FAA evaluation, with a systems engineer for a total period of 5
working days. The main task of the system engineer is to assist TDI
with final tuning adjustments to the motion system in order to receive
certification by the FAA. The FAA assistance includes travel, board
and lodging for one systems engineer and is based on 5 working days.
14. FINANCIAL ARRANGEMENT
Hydraudyne will supply a financial arrangement to TDI. TDI will pay 15%
of the total Contract value at Order Award. Thereafter TDI will not be
invoiced until the Flight Simulator is ready for training. The total
period of this financial arrangement is limited to 18 months, starting
at the date of Order Award. The financial arrangement, as agreed upon
between Mr. Peter Waasdorp (Manager Contracts & Finance, Hydraudyne) and
Mr. Ron Ellington (CEO TDI) will form the basis for payments between TDI
and Hydraudyne regarding this contract. All costs for the financial
arrangement including interest costs will be taken care of by
Hydraudyne/Mannesmann Rexroth (see attached side letter of Mr. Peter
Waasdorp).
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<PAGE>
[LETTERHEAD]
Re: Contract for two flight Simulator program of Beech 1900 Simulators.
Dear Ron,
As promised we have evaluated the possibility to extend your payment from the
period of delivery of our equipment till the moment the systems are ready for
Training at T.D.I.'s premises. This RFT takes place 6 months after final
tuning by Hydraudyne.
Due to the Milestone Schedule Appendix 4 of our contract the commence of
Tuning is scheduled for system I on June 26th, 2000 and for system II on
September 15, 2000. This means that your payment of 85% for system should take
place before the end of 2000 and for system II before March 2001.
Based on your financial information, which we received on November 12, 1999,
we are willing to accept this payment schedule based on the following
conditions.
- - Hydraudyne reserves the right of Title of the delivered equipment till
100% payment has been executed by T.D.I.
- - T.D.I. declares in writing that no thrid party can claim property rights
on the delivered motions systems until title is transferred to T.D.I.
- - T.D.I. shall show Hydraudyne before delivery that they have the financial
strength to fulfil the financial obligation on the moment the systems are
ready for training.
- - Hydraudyne will deliver a cost system, type HSE-6-MS-60-C-5D according
Appendix 5 of the contract.
- - On shipment of the systems T.D.I. will present a duly signed commitment
letter (no bank draft) stating that TDI will pay Hydraudyne the payment
milestone of 85% of each system at the moment the systems are ready for
training. (RFT), however at the latest 6 months after final tuning of the
systems.
- - Financing costs for this extended payment will be paid by Hydraudyne.
Of course this obligation will come effective in case Hydraudyne fulfils its
contractual obligations. If you can confirm the above statements, the in the
meantime in good co-operation between our companies negotiated contract shall
be effective, and will be signed by both of us not later that November 22,
1999. This letter will be as a part of our side letter of our contract
referring to item 14, page 15.
We thank you in advance for your efforts and we look forward to a good and
frutiful co-operation.
Kind regards,
HDYRAUDYNE SYSTEMS & ENGINEERING B.V.
/s/ Peter Waasdorp
Peter Waasdorp
Manager Contracts & Finance
- --------------------------------------------------------------------------------
Hydraudyne Systems & Engineering B.V. Page 16
Final Contract TDI - Hydraudyne Rev.03 17/11/99
<PAGE>
APPENDIX 2
Supply Prices and Options
(1 page)
2X TOTAL MOTION SYSTEM TYPE HSE-6-MS-60-C-5D, INCL.:
Project engineering
Project management
QA system
Documentation conform HYDRAUDYNE standard
Design reviews for first motion system
Drawings
Packing, transport, and delivery of the motion systems
(conform this contract)
Assembly + plus assembly assistance on second motion system
Installation for first motion system (no civil works)
Commissioning
Maintenance and operation course (2 days)
Fine tuning
FAA Assistance
Financial arrangement
Total price US$ 1,000,000.- per two (2) systems
Options for two motion systems (not included in scope of supply):
1. SPARE PARTS PACKAGE, CONSISTING OF:
1x Hydraulic actuator including servo controlled proportional valve
1x Digital I/O card
1x Axial piston pump
1x Set of air breathers
1x Set of fuses and bulbs for the Power Unit Control Cabinet and Motion
Control Cabinet
1x Packing and transport (CIF, Incoterms 1990) Denver USA, System #1;
CIF Boxtel, The Netherlands, System #2
Total supply price: US$ 46,000
- --------------------------------------------------------------------------------
Hydraudyne Systems & Engineering B.V. Page 17
Final Contract TDI - Hydraudyne Rev.03 17/11/99
<PAGE>
APPENDIX 3
Hour Rates Hydraudyne Engineers
(1 page)
HOUR RATES SERVICE ENGINEER
1. Hour rates are valid for travel-, working- and waiting hours.
--------------------------------------------------
Rates Zone II Service Engineer Systems
(Hydraulic) Engineer
--------------------------------------------------
--------------------------------------------------
1.1 Normal
working-hours US$ 60.- US$ 90.-
07:00 - 17:00
--------------------------------------------------
--------------------------------------------------
1.2 Overtime hours US$ 72.- US$ 120.-
Monday/Friday
--------------------------------------------------
--------------------------------------------------
1.3 Weekend hours US$ 100.- US$ 140.-
Saturday/Sunday
--------------------------------------------------
--------------------------------------------------
1.4 Hours on national
legal holidays in US$ 115.- US$ 155.-
Holland
--------------------------------------------------
- --------------------------------------------------------------------------------
Hydraudyne Systems & Engineering B.V. Page 18
Final Contract TDI - Hydraudyne Rev.03 17/11/99
<PAGE>
APPENDIX 4
Milestone Schedule
(1 page)
Contract Award November 22, 1999
Kick-Off Meeting - TDI Facility December 6, 1999
Preliminary ICD to TDI February 4, 2000
Initial ATP to TDI March 13, 2000
TDI ATP Comments to HYDRAUDYNE March 27, 2000
Final ATP April 10, 2000
Final ICD to TDI April 10, 2000
Electronics and Software (Motion Computer, etc.) to TDI April 10, 2000
FAT - System #1 April 24, 2000
Ship - System #1 May 5, 2000
Delivery - System #1 to TDI June 5, 2000
Commence Installation - System #1 at TDI June 5, 2000
Receipt of Preliminary Documentation by TDI May 29, 2000
Commence Tuning - System #1 at TDI June 19, 2000
Training Classes at TDI June 26, 2000
Ship - System #2 July 1, 2000
Delivery - System #2 to TDI August 1, 2000
Commence Installation - System #2 at TDI August 1, 2000
Receipt of Final Documentation by TDI September 15, 2000
- --------------------------------------------------------------------------------
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Final Contract TDI - Hydraudyne Rev.03 17/11/99
<PAGE>
APPENDIX 5
Technical Specification HSE-6-MS-60-C-5D
- --------------------------------------------------------------------------------
Hydraudyne Systems & Engineering B.V. Page 20
Final Contract TDI - Hydraudyne Rev.03 17/11/99
<PAGE>
APPENDIX 6
Master document Performance Bond
- --------------------------------------------------------------------------------
Hydraudyne Systems & Engineering B.V. Page 21
Final Contract TDI - Hydraudyne Rev.03 17/11/99
<PAGE>
Exhibit 23
ARTHUR ANDERSEN
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 13, 2000 for Training Devices International, Inc. (and to all
references to our Firm) included in or made a part of this Form SB-2
registration statement.
/s/ Arthur Andersen LLP
Denver, Colorado,
March 22, 2000.
<PAGE>
1/31/00
POWER OF ATTORNEY
Each of the undersigned directors and officers of Training Devices
Incorporated (the "Company") hereby authorizes Bruce S. Betschart and Ronald
C. Ellington and each of them as their true and lawful attorneys-in-fact and
agents: (1) to sign in the name of each such person and file with the
Securities and Exchange Commission a Registration Statement, Registration No.
333-85479, on an appropriate form, and any and all amendments (including
post-effective amendments) to such Registration Statement, for the
registration under the Securities Act of 1933, as amended, shares of Common
Stock (the "Offering") to be offered and sold in the Company's initial public
offering, of an underwriters' over-allotment option to purchase up to 15% of
the number of shares of Common Stock sold in the Offering, and any other
securities of the Company which the Company's Board of Directors authorizes
to be included in such Registration Statement; and (2) to take any and all
actions necessary or required in connection with such Registration Statement
and amendments to comply with the Securities Act of 1933, as amended, and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
Signature Title Date
- --------- ----- ----
/s/ Bruce S. Betschart Director, President and Chief February 1, 2000
- ------------------------- Operating Officer
Bruce S. Betschart
/s/ Ronald C. Ellington Chairman of the Board and February 1, 2000
- ------------------------- Chief Executive Officer
Ronald C. Ellington
/s/ Ann Torre Grant Director February 1, 2000
- -------------------------
Ann Torre Grant
/s/ John Jenkins Director February 1, 2000
- -------------------------
John Jenkins
/s/ Dennis Meyer Vice President, Chief February 1, 2000
- ------------------------- Financial Officer and Treasurer
Dennis Meyer
/s/ Peter Roy Director February 1, 2000
- -------------------------
Peter Roy
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