<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1997
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERNATIONAL META SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3674 33-0146747
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
100 NORTH SEPULVEDA BOULEVARD
SUITE 601
EL SEGUNDO, CALIFORNIA 90245
(310) 524-9300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
GEORGE W. SMITH
CHIEF EXECUTIVE OFFICER
INTERNATIONAL META SYSTEMS, INC.
100 NORTH SEPULVEDA BOULEVARD
SUITE 601
EL SEGUNDO, CALIFORNIA 90245
(310) 524-9300
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MATTHIAS & BERG LLP LEHMAN & EILEN
ATTN: JEFFREY P. BERG, ESQ. ATTN: HANK GRACIN, ESQ.
1990 South Bundy Drive 50 Charles Lindbergh Boulevard
Suite 790 Suite 505
Los Angeles, California 90025 Uniondale, New York 11553
Phone: (310) 820-0083 Phone: (516) 222-0888
Fax: (310) 820-8313 Fax: (516) 222-0948
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed basis pursuant to Rule 415 under the Securities Act of 1933, check the
following box. /X/
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) OFFERING PRICE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.0001 per share... (2) $ $28,375,000 $8,212.12
Shares of Common Stock underlying the
Underwriter's Warrants.................... $ $ $
Total....................................... $28,375,000 $8,212.12
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes shares of Common Stock that may be purchased by the
Underwriters from the Company to cover over-allotments, if any.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K.
Showing Location in the Prospectus of Information
Required by Items 1 through 12, Part I, of Form S-1
<TABLE>
<CAPTION>
Registration Statement Item Number and Caption Location in Prospectus
- ---------------------------------------------- ----------------------
<S> <C>
1. Forepart of the Registration Statements and
Outside Front Cover Page of Prospectus . . . . . . . . . . Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus. . . . . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back
Cover Pages of Prospectus;
Additional Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges . . . . . . . . . . . . Prospectus Summary; Risk
Factors; Selected Financial
Data
4. Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price. . . . . . . . . . . . . . . Underwriting
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . Dilution
7. Selling Security Holders . . . . . . . . . . . . . . . . . . Not Applicable
8. Plan of Distribution . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to Be Registered. . . . . . . . . . Outside Front Cover Page of
Prospectus; Dividend Policy;
Shares Eligible for Future
Sale; Description of
Securities
10. Interests of Named Experts and Counsel. . . . . . . . . . . Legal Matters
11. Information with Respect to the Registrant. . . . . . . . . Outside Front Cover Page of
Prospectus; Prospectus
Summary; Risk Factors;
Dividend Policy;
Capitalization; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Business; Management;
Compensation of Executive
Officers and Directors;
Certain Relationships and
Related Transactions; Shares
Eligible for Future Sale;
Financial Statements.
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities. . . . . . . . . . . . . . Not Applicable
</TABLE>
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
___________ SHARES
International Meta Systems, Inc. (the "Company") is hereby offering _____
shares (the "Shares") of common stock, $0.0001 par value (the "Common Stock").
See "Description of Securities" and "Underwriting."
The Company's Common Stock is currently listed for trading on the OTC
Electronic Bulletin Board maintained by the National Association of Securities
Dealers, Inc. ("NASD") or in the "pink sheets" maintained by the National
Quotation Bureau, Inc. (the "Over-The-Counter Market") under the symbol "IMES."
See "Underwriting" for information relating to the factors considered in
determining the initial public offering price. The Company has applied for
listing of the Common Stock in the NASDAQ National Market System ("NASDAQ/NMS")
under the symbol "IMES." On October 21, 1997, the last reported sales price for
the Common Stock in the Over-the-Counter Market was approximately $ 0.60 per
share. See "Risk Factors" and "Price Range of Common Stock."
THESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. INVESTMENT IN THESE SECURITIES SHOULD BE MADE
ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
"RISK FACTORS," BEGINNING AT PAGE __, AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Underwriting Discounts Proceeds to
Price to Public and Commissions (1) Company (2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............... $__________ $_________ $__________
- ----------------------------------------------------------------------------------------------
Total(3)................ $25,000,000 $2,500,000 $22,500,000
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include additional compensation to be received by the Underwriters
in the form of: (i) a non-accountable expense allowance of 3% of the gross
proceeds of this Offering or $_________ per share (for an aggregate amount of
$__________, or $________ if the over-allotment option described in note 3 below
is exercised in full); and (ii) Underwriters' warrants to purchase up to
___________ shares of Common Stock to be sold to such Underwriters for nominal
consideration, exercisable commencing one year after the date of this
Prospectus. In addition, the Company has agreed to indemnify the Underwriters
against certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See Underwriting."
(2) Before deducting expenses of the Offering, estimated at $__________,
payable by the Company. See "Use of Proceeds" and "Underwriting."
(3) The Underwriters have been granted a 30-day option (the "Over-allotment
Option") to purchase up to _________ additional shares of Common Stock from the
Company, on the same terms set forth above, solely to cover over-allotments, if
any. If the Underwriters' Over-allotment Option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $28,375,000, $2,837,500 and $25,537,500, respectively.
-------------------------------
The Shares are being offered, subject to prior sale, when, as and if
delivered to and accepted by Nichols, Safina, Lerner & Co., Inc. and
______________ (the "Representatives"), as Representatives of the underwriters
(the "Underwriters") of this Offering, and subject to approval of certain legal
matters by counsel and subject to certain other conditions. The Representatives
reserve the right to withdraw, cancel or modify the offering without notice and
to reject any order, in whole or in part. It is expected that delivery of the
certificates representing the Shares will be made against payment therefor at
the offices of Nichols, Safina, Lerner & Co., Inc. in New York, New York, on or
about ____________, 1997.
NICHOLS, SAFINA, LERNER & CO., INC.
The date of this Prospectus is _________, 1997
<PAGE>
This Prospectus may be deemed to contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Forward-looking statements in this Prospectus or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission (the "Commission"), reports to the Company's stockholders and other
publicly available statements issued or released by the Company involve known
and unknown risks, uncertainties and other factors which could cause the
Company's actual results, performance (financial or operating) or achievements
to differ from the future results, performance (financial or operating) or
achievements expressed or implied by such forward-looking statements. Such
future results are based upon management's best estimates based upon current
conditions and the most recent results of operations. These risks include, but
are not limited to, the risks set forth herein, each of which could adversely
affect the Company's business and the accuracy of the forward-looking statements
contained herein.
-----------------------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL
MARKET SYSTEM OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP MEMBERS, IF
ANY, OR THEIR RESPECTIVE AFFILIATES, MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK IN THE NASDAQ NATIONAL MARKET SYSTEM IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "UNDERWRITING."
ii
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information in this Prospectus. This
summary should be read in conjunction with, and is qualified in its entirety by,
the more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus: (i) assumes that the Over-allotment Option
will not be exercised, and (ii) gives effect to a reverse stock split of the
issued and outstanding shares of Common Stock on a 1-for-_____ basis to be
effectuated on the effective date (the "Effective Date") of the Registration
Statement. The Shares offered hereby involve a high degree of risk. Investors
should carefully consider the information set forth under the heading "Risk
Factors."
THE COMPANY
The Company designs and develops x86-compatible microprocessors and related
components and designs. A microprocessor is an integrated circuit consisting of
millions of transistors which executes instructions to perform logical and
mathematical operations in electronic devices. Microprocessors serve as the
central processing unit or management/control unit of personal computers ("PCs")
and other electronic devices utilizing microprocessors (collectively,
"microprocessor-based devices"). The microprocessor is responsible for
controlling data flowing through the PC or microprocessor-based device,
manipulating such data as specified by the related operating software, and
coordinating all hardware functions within the system. The demand for higher
performance PCs and microprocessor-based devices has driven advances in circuit
design and large scale integration process technology. Improvements in the
performance of microprocessors, coupled with decreases in costs resulting from
advances in design and process technology, have substantially broadened the
market and increased the demand for PCs, microprocessor-based devices and
microprocessors.
The Company's operating strategy seeks to take advantage of a number of
emerging trends in the PC and microprocessor-based device industries, including:
(i) a focus on the fast growing high performance segments of the PC and custom
core microprocessor markets, (ii) maintaining compatibility with widely accepted
x86 based software standards, (iii) accessing advanced manufacturing
capabilities available by contracting with third-party manufacturers, (iv)
providing hardware compatibility to allow for universal product application, and
(v) utilizing advanced automated design technologies to lower the cost of design
and accelerate the time to market for future versions of its products and
products of its customers.
The Company's marketing strategy is targeted to the high performance
segments of the microprocessor industries. The Company has focused its
marketing strategy on four (4) segments of the market: (i) standard products
which may serve as replacement upgrade microprocessors for installed PCs
which are based on socket-7 pin compatible Pentium-TM- microprocessors
(standard products for microprocessor retrofitting), (ii) customized versions
of standard microprocessors designed for original equipment manufacturers
("OEMs") who desire to integrate x86 compatible custom microprocessors with
their technologies (custom core products), (iii) programmable logic features
for the design or manufacture of custom products (design elements), and (iv)
the technological expertise and capability of the Company's design team for
OEMs to utilize in integrating the Company's custom core products and design
elements into the OEMs' customized technologies (design services).
The Company's principal executive offices are located at 100 North
Sepulveda Boulevard, Suite 601, El Segundo, California 90245, (310) 524-9300.
2
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities Offered by the
Company...................... _________ Shares of Common Stock. See
"Description of Securities" and "Underwriting."
Common Stock Outstanding(1):
Before the Offering.......... 38,855,941 shares
After the Offering........... __________ shares
Use of Proceeds................ The Company intends to use the net proceeds of
this Offering to fund research and development,
administrative expenses, repayment of debt and for
working capital and general corporate purposes.
See "Use of Proceeds."
Risk Factors and Dilution..... The securities offered hereby are highly
speculative and involve a high degree of risk and
immediate substantial dilution. These factors
include, but are not limited to risks related to
the Company's historical lack of revenues or
profitability, legislative and regulatory
restrictions impacting the Company's business
operations and industry and the market for the
securities offered hereby. An investment in these
securities should be made only by investors who
can afford the loss of their entire investment.
See "Risk Factors" and "Dilution."
Proposed
NASDAQ/NMS Symbol(2)
Common Stock.................. IMES
__________________________
</TABLE>
(1) Does not include shares of Common Stock that are reserved for issuance
upon exercise of the Underwriters' Warrants or pursuant to certain stock option
plans of the Company, certain other options, warrants and convertible securities
of the Company. See "Price Range of Common Stock," "Management - Stock Option
Plans," "Certain Relationships and Related Transactions," "Description of
Securities" and "Underwriting."
(2) The Company's Common Stock is currently listed for trading in the
Over-the-Counter Market under the symbol "IMES." The Company has applied for
the listing of the Common Stock for trading in the NASDAQ/NMS. See "Risk
Factors" and "Price Range of Common Stock."
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
(In Thousands, except for Per Share Data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ --------------------------
1992 1993 1994 1995 1996 1996 1997
------------------------------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $ 6 $ 0 $ 0 $ 910 $ 300 $ 0 $ 0
Loss from operations $( 756) $( 897) $(1,207) $(1,716) $(7,406) ($2,916) $(4,735)
Net loss $( 782) $( 873) $(1,153) $(1,712) $(7,135) ($2,830) $(4,673)
Net loss per $(0.04) $(0.04) $( 0.05) $( 0.06) $( 0.20) ($ 0.09) $( 0.12)
common share
Weighted average
common shares
outstanding 17,656 22,576 25,602 26,652 35,118 32,782 37,669
<CAPTION>
DECEMBER 31, JUNE 30, 1997
------------------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(1)
------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit) $ 214 $ 969 $ 314 $ 801 $4,121 $ (484) $24,516
Total assets $1,692 $2,584 $2,269 $2,353 $5,402 $1,174 $26,394
Total liabilities $ 146 $ 115 $ 145 $ 177 $ 465 $1,098 $ 778
Total stockholders' equity $1,546 $2,468 $2,124 $2,176 $4,937 $ 616 $25,616
</TABLE>
____________________
(1) PRO FORMA to give effect to: (i) the sale of __________ shares of Common
Stock offered by the Company, and (ii) the application of the net proceeds
therefrom estimated at approximately $___________. See "Use of Proceeds,"
"Capitalization" and "Description of Securities."
4
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION. AN INVESTMENT IN THESE SECURITIES
SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. IN ADDITION TO THE FACTORS SET FORTH ELSEWHERE IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD GIVE CAREFUL CONSIDERATION TO THE FOLLOWING RISK
FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE
SECURITIES OFFERED HEREBY.
THIS PROSPECTUS MAY BE DEEMED TO CONTAIN FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE REFORM ACT. FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS OR
HEREAFTER INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE
COMMISSION, REPORTS TO THE COMPANY'S STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE
STATEMENTS ISSUED OR RELEASED BY THE COMPANY INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE
RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON
MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT CONDITIONS AND THE MOST RECENT
RESULTS OF OPERATIONS. THESE RISKS INCLUDE, BUT ARE NOT LIMITED TO, RISKS SET
FORTH HEREIN, EACH OF WHICH COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS AND
THE ACCURACY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
LACK OF REVENUES AND HISTORY OF LOSSES. The Company has generated minimal
revenues from operations since inception and no revenues from sales of products
since approximately 1990, and has been engaged primarily in research and
development of its products. The Company has only generated revenues in 1995
and 1996 from certain milestone payments related to the research and development
of the Company's microprocessors. The Company has incurred net losses in each
year since inception, and, as of June 30, 1997, the Company had an accumulated
deficit of $18,320,609. As of the date of this Prospectus, the financial
condition of the Company raises substantial doubts about the ability of the
Company to continue as a going concern. The Company expects to continue to
incur significant operating losses over at least the following two years as it
continues to devote significant financial resources to product development
activities and as the Company expands its operations. In order to achieve
profitability, the Company will have to develop, manufacture and market products
which are accepted on a widespread commercial basis. There can be no assurances
that the Company will develop, manufacture or market any products successfully,
operate profitably in the future or generate revenues from operations, or that
capital in excess of the net proceeds of this Offering will not be required in
order to accomplish the Company's current business plan. See "Use of Proceeds,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Financial Statements."
QUALIFIED FINANCIAL STATEMENTS; POTENTIAL NEED FOR ADDITIONAL FINANCING.
The Company's auditors have included an explanatory paragraph in their Report of
Independent Certified Public Accountants to the effect that recoverability of a
major portion of the Company's recorded asset amounts shown in the Company's
financial statements is dependent upon continued operations of the Company,
which in turn, is dependent upon the Company's ability to continue to meet its
financing requirements and to succeed in its future operations. The Company has
historically financed its operations principally through the private placement
of equity and debt securities. From January 1, 1995 through June 30, 1997, the
Company had raised gross proceeds of $11,345,000 through such private
placements. Subsequent to June 30, 1997, the Company has obtained $2,360,000 in
loan financing, including $2,000,000 from affiliates. The Company continues to
require such financing in order to remain in business. The Company believes
that the proceeds of this Offering will be sufficient to finance the Company's
operations and continued development of the Company's products for a period of
approximately eighteen (18) months following the date of this Prospectus, based
on the Company's current business plan. However, there can be no assurance that
the Company will be able to generate revenues prior to such date or at all, or
that the Company will not require additional financing at or prior to such date
in order to continue operations and product development. There can be no
assurances that any additional sources of financing will be available on terms
favorable to the Company, or at all, or that the business of the
5
<PAGE>
Company will ever achieve revenues or profitable operations. Further, any
additional financing may be senior to the Company's Common Stock or result in
significant dilution to the holders of the Common Stock. In the event the
Company does not receive any such financing or generate profitable operations,
management may have to suspend or discontinue its business activity or certain
components thereof in its present form or cease operations altogether. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Financial Statements."
NEED TO DEVELOP AND POTENTIAL OBSOLESCENCE OF NEW PRODUCTS. The Company is
engaged in the business of developing new products and technologies for the
microprocessor and computer industries, but has not completed development on any
such product or technology to the point where it may be commercially introduced
into the market, and no assurance can be given that the Company will ever be
able to do so. The markets for the Company's products are characterized by
rapidly changing technology, frequent new product introductions and price
erosion. Accordingly, the Company believes its future prospects depend on its
ability not only to enhance and successfully market its products in development,
but also to develop and introduce new products in a timely fashion that achieve
market acceptance. There can be no assurance that the Company will be able to
identify, design, develop, market or support such products successfully or that
the Company will be able to respond effectively to technological changes or
product announcements by competitors. Delays in new product introductions or
product enhancements, or the introduction of unsuccessful products, could have a
material adverse effect on the Company. Even if the Company receives all of the
proceeds from this Offering and completes the development of any of its
products, no assurance can be given that any such product will perform according
to the design specifications of the Company. Even if such product performs to
such specifications, no assurance can be given that technologies developed by
others will not render any product developed by the Company obsolete, or
otherwise significantly diminish the value of the Company's products, or that
there will still be a market for such product by the time such product is ready
for production. If the Company does not develop one or more finished products at
a time when a market window for such a product is still open, there would be a
material adverse effect on the Company's financial position, and the Company may
be compelled to curtail or cease its operations altogether. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
RISK OF MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS. The Company's growth
will depend on the Company's ability to identify, develop and successfully
market new products. The microprocessor and computer industries are populated
by many companies of various sizes and types and are characterized by constant
and rapid technological and other change, innovation and new discoveries, which
make conducting such a business more difficult. The identification of specific
market needs is seldom made by any one company alone, and no assurance can be
given that there are not many other microprocessor companies actively engaged in
developing products designed to solve the needs identified by the Company or
that one or more such companies could not develop a product which has the effect
of capturing the market which has been targeted by management of the Company for
its products or making obsolete a product or technology developed by the
Company. There can be no assurance that any products which may be developed by
the Company, if at all, will meet any specific needs then existing in the market
or that such products will obtain commercial acceptance in the market. See
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Financial Statements."
DIFFICULTY OF MARKETING THE COMPANY'S PRODUCTS. The Company faces a number
of obstacles to the successful marketing of certain of its products which are
under development and certain of its products which are ready for marketing, but
which have not been successfully marketed as of the date of this Prospectus. No
assurance can be given that the markets currently projected by the Company for
such products will exist, or if it does, that the products using the Company's
technologies will achieve acceptance in the market. Even in the event that the
Company's products find a level of market acceptance, there can be no assurance
that the sale of such products will generate significant revenue for or result
in profitability to the Company. The Company may face a formidable task in
marketing such products in the face of efforts by other companies to market
their
6
<PAGE>
own products, even if such companies' products do not, in the opinion of
management of the Company, perform as effectively or efficiently as the
Company's products. Further, no assurance can be given that any market share
which may be achieved by the Company will not be overtaken by products
manufactured by other companies possessing far greater technical and financial
resources. See "Business - Products, License and Production Agreement -
Competition."
DEPENDENCE ON MANUFACTURER AND RISKS OF ACCESS TO ALTERNATIVE MANUFACTURING
SOURCES AND MANUFACTURING DELAYS. The Company will rely on outside parties for
the manufacture of its products. Accordingly, the Company will be dependent on
the capabilities of these outside parties for the successful manufacture of its
products. There can be no assurance that these manufacturers will be willing or
able to meet the Company's product needs in a satisfactory and timely manner.
The Company's reliance on third-party manufacturers involves a number of
additional risks, including the absence of guaranteed capacity, and reduced
control over delivery schedules, quality assurance, production yields and costs.
Although the Company believes that these manufacturers would have an economic
incentive to perform such manufacturing for the Company, the amount and timing
of resources to be devoted to these activities are not within the control of the
Company, and there can be no assurance that manufacturing problems will not
occur in the future.
As of the date of this Prospectus, the Company has entered into an
agreement (the "Production Agreement") with one manufacturer (the
"Manufacturer") for the production of the Meta 6000. The Production Agreement
provides limited assurances of deliveries of such products for a limited period
of time. To generate revenues from sales of the Company's Meta 6000 chips and
related technologies, the Company will need to obtain volumes of wafers of the
of Meta 6000 chips. The Company expects to ask for needed supply commitments
over time, but there can be no assurance that the Company will be successful in
obtaining those requested supply commitments. The Manufacturer's specific
manufacturing technology ("fabrication process") which the Company and the
Manufacturer expect to use to fabricate the Meta 6000 is not a qualified
manufacturing process for volume production as of the date of the Production
Agreement. Aggressive technological cooperation between the Company and the
Manufacturer is required by the competitive nature of the microprocessor
business, and advanced knowledge of this "fabrication process" is anticipated to
be provided by the Manufacturer to the Company under the terms of the Production
Agreement. There can be no assurance that this fabrication process will be
fully qualified by the Manufacturer and available for manufacture of the Meta
6000 as soon as desired, or at all.
If one or more products developed by the Company under the Production
Agreement should achieve some measure of acceptance in the market, the Company's
ability to earn revenue from the commercial exploitation of such products will
depend on the manufacture of such products by the Manufacturer. Under the
Production Agreement, the Manufacturer is under no obligation to manufacture and
sell any chips developed pursuant to the Production Agreement. In addition, to
the extent that the Company wishes to sell chips directly, the Company's success
will depend in significant part on the timely and adequate production of chips
by the Manufacturer for an inventory of such chips, on terms to be negotiated
between the Company and the Manufacturer, and no assurance can be given that the
Manufacturer will be able or willing to provide such production, or if it does,
that it will do so on terms and conditions satisfactory to the Company. In such
circumstance, the Company may not be able to continue in business.
Production of the Company's Meta 6000 requires the use of process
technologies, which are available from only a few sources. There can be no
assurance that the Company will continue to have access to such technology or to
other process technologies that the Company may require for future products. In
the event the Manufacturer is unwilling to meet the Company's needs, the Company
believes alternative suppliers could be found. However, a change in suppliers
or any significant delay in the Company's ability to have access to such
resources, whether resulting from the need to access alternative process
technologies, to resolve manufacturing problems at existing suppliers or for
other reasons, would have a material adverse effect on the Company's delivery
schedules, business, operating results and financial condition.
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There can be no assurance that the Company will be able to enter into
agreements with additional manufacturers or that, if it is able to enter into
such agreements, that those agreements will be on terms favorable to the
Company. Converting the physical design for the Company's processor and system
logic products to the design rules of a different fabrication facility is a
difficult task. Each new manufacturer has a different set of design rules for
manufacturing products, which may require the Company to generate a new design
for each manufacturer. Additional silicon and design iterations in excess of
the Company's current plan, if required, may cause additional delays and may
cause the Company to incur substantial additional costs. Product positioning
and market acceptance may be adversely affected by such delays, particularly if
competitors introduce improved or superior products during such period. There
can be no assurance that such additional iterations will not be required. See
"Business - License and Production Agreement."
DEPENDENCE ON THE PRODUCTION AGREEMENT. As of the date of this Prospectus,
the Production Agreement is the Company's only contract which has the potential
for generating revenue from the sale or license of the Company's hardware
products. Fulfillment of the Company's development obligations under the
Production Agreement will require the Company to concentrate its resources
thereon, reducing the possibility that the Company will be able to identify and
obtain other potential arrangements for the development and exploitation of its
products and technologies. Thus, the success of the Company's microprocessor
business is dependent in large part on the success of the development and
exploitation of products pursuant to the terms of the Production Agreement. If
the Company is unable to meet its obligations under the Production Agreement, or
if the Production Agreement is terminated for any reason, there would be a
material adverse effect on the Company's financial condition, and the Company
may be compelled to curtail or cease business operations altogether. See
"Business - License and Production Agreement."
DEPENDENCE ON EFFECTIVE PRODUCT DEVELOPMENT. In order to compete
successfully in the future, the Company will continuously need to develop higher
performance and cost-reduced versions of the Meta 6000, and will also need to
develop future generations of products. The Company has experienced significant
delays in product development in the past. The Company's future products will
require significant additional research and development prior to their
commercialization. Further design and silicon iteration may be necessary to
attain competitive performance for any future generation products. The nature
of the Company's research and development activities is inherently complex,
precluding definitive statements as to the time required and costs involved in
reaching certain objectives. Consequently, actual research and development
costs could exceed amounts budgeted from the proceeds of this Offering and
estimated time frames may require extension. Any delays or additional research
costs could require the raising of funds in addition to the proceeds of this
Offering, and therefore could have a material adverse effect on the Company's
business and results of operations. There can be no assurance that any
potential products will be capable of being produced in commercial quantities on
a timely basis at acceptable costs or be successfully marketed, or that the
Company will be able to obtain such additional financing on terms favorable to
the Company, or at all. See "Business."
PRODUCT DEFECTS. In the event that the Company produces and distributes
products, it is possible that one or more of the Company's products may be found
to be defective after the Company has already shipped in volume, requiring a
product replacement or a software fix which might cure such defect, but impede
performance. Product returns and the potential need to remedy defects or
provide replacement products or parts could impose substantial costs to the
Company and have a material adverse effect on the Company. See "Business."
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NO INDEPENDENT CERTIFICATION OF PRODUCTS. The Company is currently
developing products and technologies which have not been commercially
distributed to the public. None of the Company's proposed products have been
subjected to independent examination with respect to their efficacy or
marketability. Further, in order to market any microprocessors which may be
produced by the Company and to demonstrate compatibility with software or
hardware of manufacturers which constitute a significant portion of the
established market, prior to volume production and product shipment, the Company
must receive independent certifications from other manufacturers, such as
Windows certification from Microsoft, and Platinum certification from XXCAL, a
nationally recognized testing organization. Although the Company intends to
submit its products to rigorous internal (ITT and proprietary test suites) and
external (XXCAL and Microsoft certification) testing, there can be no assurance
that the Company's products will receive such certifications or be compatible
with all standard PC software or hardware. Further, the Company's library of
design elements must also be certified by tool vendors, or may require
certification by industry standard bodies in the future. Any inability of the
Company's products to achieve such compatibility with other software or hardware
or to obtain required certifications would have a material adverse effect on the
Company's business and operating results. See "Business."
LARGER AND MORE ESTABLISHED COMPETITION. The market for the Company's
products is extremely competitive. The Company directly and indirectly
competes with other businesses, including businesses in the computer and
microprocessor industries. In most cases, these competitors are
substantially larger and more firmly established, have greater marketing and
development budgets and substantially greater capital resources than the
Company. Accordingly, there can be no assurance that the Company will be
able to achieve and maintain a competitive position in the Company's
industry. Further, in order to compete effectively in the market for high
performance x86 microprocessors, the Company must develop and introduce on a
timely basis competitive products that embody new technology, meet evolving
industry standards, and achieve increased levels of performance at prices
acceptable to the market. In particular, the market for microprocessor
products has been and continues to be characterized by intense and increasing
price competition, even for advanced microprocessor products. Intel has
increasingly made more frequent and more significant price reductions to
stimulate market demand for its Pentium-TM- processors and encourage the
migration of original equipment manufacturers ("OEMs") and end users to its
latest generation of microprocessors.
The Company's competitors in the market for x86 microprocessors include
Intel, Advanced Micro Devices, Inc. ("AMD"), and National Semiconductor
(which recently acquired Cyrix) and others with substantially greater
resources in technology, finance, manufacturing, sales, marketing,
distribution, customer service and support, as well as greater experience and
name recognition, than the Company. Intel, in particular, has long had a
dominant position in the market for microprocessors used in PCs. Intel's
dominant market position, to date, has allowed it to set standards and thus
dictate the type of product the market requires of Intel's competitors. The
Company believes that the Meta 6000 will need to be competitive primarily
with Intel Pentium-TM- microprocessors. It is expected that Intel will
introduce faster versions of the Pentium-TM- and that other companies will
continue to develop competitive technologies. Intel has announced the
architecture and technology of its next generation processor. AMD has
announced that it has begun the shipment of its sixth generation product and
Cyrix has announced it intends to begin shipping its new microprocessor
product. The Company expects substantial direct competition, both from
existing competitors and from new market entrants.
Larger and more established competitors may seek to impede the Company's
ability to establish a market share for any products which may be developed by
the Company through competitive pricing activities. Also, prospective customers
for the Company's products may be reluctant to disrupt relationships with
well-established distributors of products which may be comparable in quality or
pricing to any of the Company's products.
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The Company's competitors spend substantial sums on research and
development, manufacturing facilities, and intensive advertising campaigns
designed to engender brand loyalty among PC end-users in order to maintain their
respective market positions. The Company does not have comparable resources
with which to invest in research and development and advertising and is at a
competitive disadvantage with respect to its ability to develop products. The
Company may also encounter difficulties in customer acceptance because it is
likely to be perceived as a new processor supplier whose identity is not yet
well known and whose reputation and commercial longevity are not yet
established. Substantial marketing and promotional costs, possibly in excess of
what the Company can afford, may be required to overcome barriers to customer
acceptance. There can be no assurance that the Company will be able to overcome
such barriers. The failure to gain customer acceptance of the Meta 6000 and
related technology would have a material adverse effect on the Company. So long
as Intel remains in this dominant position, its product introduction schedule
and product pricing will materially, and at times adversely, affect the
Company's business and financial condition. See "Business - Competition."
DEPENDENCE ON MARKET DEVELOPMENT. In contrast to the standard x86
processor market, the market for custom x86-compatible Pentium-TM- cores is
not fully developed. Although no directly equivalent combination of core
products and services intended to be offered by the Company is currently
being marketed, it is possible that such competitive products may appear in
the future. Sales of the Company's custom core products and services could
also be adversely affected by customer substitution of variants of
microprocessors currently produced or which may be produced by Intel and
others. There can be no assurance that the Company's custom core products
and services will be preferred over existing lower-performance 386 and
486-class cores, or future Pentium-TM- class alternatives.
The Company also intends to develop, market and sell design elements
derived from its research and development efforts. Such design elements, which
include so-called "custom super-macro cells," like adders and multipliers,
synthesis libraries and other intellectual property, also may address an
emerging market. Sales of these products and the Company's financial
performance could be adversely affected by competition from others and future
improvements in silicon design technology (e.g., more effective synthesis
tools), the appearance of superior competitive products, or the industry
infrastructure associated with advanced silicon design. No assurance can be
given that this market will develop as anticipated by the Company, or that the
Company will be able to develop the alliances necessary to penetrate this market
effectively. See "Business - Sales, Marketing and Distribution."
NO MARKETING STUDIES. No independent studies with regard to feasibility of
the Company's proposed business plan have been conducted at the expense of the
Company or by any independent third parties with respect to the Company's
present and future business prospects and capital requirements. In addition,
there can be no assurances that the Company's products and services will find
sufficient commercial acceptance in the marketplace to enable the Company to
fulfill its long and short term goals, even if adequate financing is available
and products are ready for market, of which there can be no assurance. See
"Business."
HIGHLY LEVERAGED BUSINESS OPERATIONS. As of the date of this Prospectus,
the Company had short-term borrowings in the aggregate amount of $2,680,000,
of which $2,000,000 was payable to an affiliate of Martin S. Albert, a
director and principal beneficial stockholder of the Company and secured by
the Company's intellectual property rights related to the Meta 6000. In
addition, during the period in which such $2,000,000 obligation remains
unpaid, such affiliate of Mr. Albert has the right to appoint an additional
member to the Company's Board of Directors, which right has not been
exercised as of the date of this Prospectus. The Company intends to pay
$680,000 of these short-term obligations to certain non-affiliates from the
proceeds of this Offering. The Company may require additional financings in
order to pay off these obligations, and the failure to raise additional funds
and the default on any of these obligations could have a material adverse
effect upon the business operations of the Company. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition,"
"Certain Relationships and Related Transactions" and "Underwriting."
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DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the skills of
its management and technical team. There is strong competition for qualified
personnel in the computer microprocessor industry, and the loss of key personnel
or an inability to continue to attract, retain and motivate key personnel could
adversely affect the Company's business. There can be no assurances that the
Company will be able to retain its existing key personnel or to attract
additional qualified personnel. The Company does not have key-person life
insurance on any of its employees, other than George Smith, its Chief Executive
Officer. See "Management."
RELIANCE ON PATENT PROTECTION AND PROPRIETARY TECHNOLOGY. The Company's
business is dependent upon its ability to protect its intellectual property,
including patented and other proprietary technology, certain of which is
licensed by the Company and certain of which is owned by the Company. To the
extent the Company or the owners of the patented technology are unsuccessful in
protecting proprietary rights to such technology or such technology may infringe
on proprietary rights of third parties, that portion of the Company's business
could suffer. The Company's more significant proprietary technology is based on
unpatented trade secrets and know-how. To the extent that the Company relies
upon unpatented trade secrets and know-how and the development of new products
and improvements thereon in establishing and maintaining a competitive advantage
in the market for the Company's products, there can be no assurances that such
proprietary technology will remain a trade secret or that others will not
develop substantially equivalent or superior technologies to compete with the
Company's products. In addition, there can be no assurances that others will
not independently develop similar or superior technologies which will enable
them to provide superior products or services. Further, there can be no
assurances that patentable improvements on such technology will be developed or
that existing or improved technology will have competitive advantages or not be
challenged by third parties. The Company also has certain proprietary rights in
certain registered trademarks related to the Company's products. No assurance
can be given that the trademarks will afford the Company any competitive
advantages. Further, the microprocessor industry has been marked by costly and
time-consuming litigation with respect to intellectual property rights between
competitors. There can be no assurances that third parties will not claim that
some or all of the Company's technology infringes on proprietary rights of
others. Such litigation may be used to seek damages or to enjoin alleged
infringement of proprietary rights of others. Further, the defense of any such
litigation, whether or not meritious, may divert financial and other resources
of the Company, including the proceeds of this Offering, which may otherwise be
devoted to development of the Company's business plan, and therefore, may have a
material adverse effect on the financial condition of the Company. An adverse
decision to the Company in any such litigation may result in a significant
damages award payable by the Company or enjoin the Company from marketing its
then existing products, and therefore, would have an adverse effect on the
Company's ability to continue in business. In the event of an adverse result in
such litigation, the Company would be required to expend significant resources
to develop non-infringing technology or to obtain licenses to the disputed
technology from third parties. There can be no assurances that the Company will
have the resources to develop or license such technology, or if so, that the
Company would be successful in such development or that any such licenses would
be available on commercially reasonably terms.
Further, the Company may be required to commence litigation against third
parties to protect any proprietary rights of the Company. There can be no
assurances that the Company will be able to afford to prosecute such litigation,
or if so, that such litigation will be successful. See "Business - Patents."
RISK OF LOSING NASDAQ/NMS LISTING. The Company's Common Stock is currently
quoted in the over-the-counter market (the "Over-the-Counter Market") in the
so-called "pink sheets" or the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. ("NASD"). The Company has applied for
the Common Stock to be listed in the NASDAQ/NMS and anticipates that it will
meet the initial inclusion requirements for the NASDAQ/NMS at the time of the
closing of this Offering. Although the Company believes that it meets the
current NASDAQ/NMS initial listing requirements and expects to be included on
the NASDAQ/NMS, there can be no assurances that the Company will meet the
criteria for continued listing on the NASDAQ/NMS. Continued inclusion on the
NASDAQ/NMS generally requires that a company would
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<PAGE>
need to have, among other things: (i) net tangible assets of $4,000,000, a
minimum public float of 750,000 shares with an aggregate market value of
$5,000,000, and a minimum bid price of $1.00 per share, or (ii) either a
market capitalization, total assets or total revenues of $50,000,000 and, in
addition, a minimum public float of 1,100,000 shares with an aggregate market
value of $15,000,000 and a minimum bid price of $5.00 per share.
Additionally, for continued listing on the NASDAQ/NMS, a company will be
required to continue to have at least two independent directors, and an Audit
Committee, a majority of the members of which would need to be independent
directors. If the Company is unable to satisfy the NASDAQ/NMS maintenance
requirements, its Common Stock may be delisted from the NASDAQ/NMS. In
addition, the NASDAQ/NMS has the right to review and reverse a decision to
list a security on the NASDAQ/NMS before or after the completion of an
offering. In the event of any such delisting, trading, if any, in the Common
Stock, would thereafter be conducted in the Over-the-Counter Market, and it
could be more difficult to obtain quotations of the market price of the
Company's Common Stock. Consequently, the liquidity of the Company's Common
Stock could be impaired, not only in the number of securities which could be
bought and sold, but also through delays in the timing of transactions,
reduction in participation of broker/dealers, and security analysts' and
media's coverage of the Company and, further, result in difficulty in
obtaining future financing for the Company. See "Underwriting."
EFFECT OF REVERSE STOCK SPLIT ON MARKET FOR COMMON STOCK. The Company
intends to effect a reverse split of the issued and outstanding shares of Common
Stock, excluding the shares to be issued in connection with this Offering, on a
1-for-___________ basis on the Effective Date. Although the number of shares of
Common Stock issued and outstanding will be reduced by a factor of
_____________, and the offering price on the Effective Date will be $________
per share, after giving effect to the reverse stock split, there can be no
assurance that the market price will increase proportionately to the ratio of
the reverse split in the future based on historical market prices. See "Price
Range of Common Stock" and "Underwriting."
DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock is
currently listed for trading in the Over-the-Counter Market. The Company has
applied for the Common Stock to be listed in the NASDAQ/NMS upon effectiveness
of this Offering. If, at any time, the Company's securities are not listed for
trading in the NASDAQ/NMS, the Company's securities could become subject to the
"penny stock rules" adopted pursuant to Section 15 (g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The penny stock rules
apply to non-NASDAQ companies whose common stock trades at less than $5.00 per
share or which have tangible net worth of less than $5,000,000 ($2,000,000 if
the company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stock" because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that the Company's securities become
subject to the "penny stock rules," there may develop an adverse impact on the
market for the Company's securities. See "Underwriting."
CERTAIN REGISTRATION RIGHTS. The Company has entered into various
agreements pursuant to which certain holders of the Company's outstanding Common
Stock and convertible securities have been granted the rights under various
circumstances, to have Common Stock that is currently outstanding or underlying
such convertible securities registered for sale in accordance with the
registration requirements of the Securities Act upon demand or which may be
"piggybacked" to a registration statement which may be filed by the Company.
Any such registration statement may have a material adverse effect on the market
price for the Company's Common Stock resulting from the increased number of free
trading shares of Common Stock in the market. There can be no assurances that
such registration rights will not be enforced or that the enforcement of such
registration rights will not have a material adverse effect on the market price
for the Common Stock. See "Certain Relationships and Related Transactions,"
"Description of Securities" and "Dilution."
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LACK OF DIVIDENDS ON COMMON STOCK. The Company has paid no dividends on
its Common Stock to date and there are no plans for paying dividends in the
foreseeable future. The Company intends to retain earnings, if any, to provide
funds for the expansion of the Company's business. See "Dividend Policy" and
"Description of Securities."
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Company
is subject to certain provisions of the Delaware General Corporation Law which,
in general, restrict the ability of a publicly held Delaware corporation from
engaging in certain "business combinations," with certain exceptions, with
"interested stockholders" for a period of three (3) years after the date of
transaction in which the person became an "interested stockholder." Further,
the Company's Certificate of Incorporation includes certain provisions which are
intended to protect the Company's stockholders by rendering it more difficult
for a person or persons to obtain control of the Company without cooperation of
the Company's management. These provisions include the implementation of a
classified Board of Directors and certain super majority requirements for the
amendment of the Company's Certificate of Incorporation and Bylaws. Such
provisions are often referred to as "anti-takeover" provisions. The inclusion
of such "anti-takeover" provisions in the Certificate of Incorporation may
delay, deter or prevent a takeover of the Company which the stockholders may
consider to be in their best interests, thereby possibly depriving holders of
the Company's securities of certain opportunities to sell or otherwise dispose
of their securities at above-market prices, or limit the ability of stockholders
to remove incumbent directors as readily as the stockholders may consider to be
in their best interests. See "Description of Securities - Certain Business
Combinations and Other Provisions of Certificate of Incorporation."
DILUTION. The public offering price of the Shares of Common Stock is
substantially higher than the book value per share of the Common Stock. This
Offering will result in immediate and substantial dilution of $________ per
share of Common Stock (or _______% of the assumed offering price per share),
based on the Company's capitalization as of June 30, 1997, which amount
represents the difference between the net tangible book value per share of
Common Stock before and after the Offering. As of the date of this Prospectus,
the Company had __________ shares of Common Stock issued and outstanding. See
"Dilution" and "Description of Securities."
SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES. Future
sales of shares of Common Stock by the Company and its stockholders could
adversely affect the prevailing market price of the Common Stock. There are
currently _________ restricted shares and __________ shares of Common Stock
which are freely tradeable or eligible to have the restrictive legend removed
pursuant to Rule 144(k) promulgated under the Securities Act. Of the _________
restricted shares, __________ shares have been held for at least one year from
the date of this Prospectus, and in the absence of an agreement with the
Representatives, are currently eligible for resale under Rule 144. Of the
restricted shares, __________ shares held by certain of the Company's officers
and directors will be subject to certain lock-up agreements with the
Representatives during the __________ (_____) month period following the date of
this Prospectus. Further, the Company has granted options to purchase up to an
additional 5,394,450 shares of Common Stock, 2,940,117 of which are currently
exercisable, and warrants to purchase up to 864,298 shares of Common Stock,
614,298 of which warrants have certain demand and piggyback registration
rights. The Company has filed a registration statement which registers
___________ shares of Common Stock underlying certain of the currently
exercisable options, and holders of options to purchase an additional
____________ shares have certain demand and piggyback registration rights in
connection with such options. Sales of substantial amounts of Common Stock in
the public market, or the perception that such sales may occur, could have a
material adverse effect on the market price of the Common Stock. Pursuant to
its Certificate of Incorporation, the Company has the authority to issue
additional shares of Common Stock and Preferred Stock. The issuance of such
shares could result in the dilution of the voting power of Common Stock
purchased in the Offering. See "Description of Securities," "Shares Eligible
for Future Sale," "Principal Stockholders" and "Underwriting."
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FUTURE ISSUANCES OF PREFERRED STOCK. The Company's Certificate of
Incorporation, as amended, authorizes the issuance of preferred stock with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors, without shareholder approval. In the event of the
issuance of additional series of preferred stock, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. Although the Company has no
present intention to issue any shares of its preferred stock, there can be no
assurances that the Company will not do so in the future. See "Description of
Securities."
UNDERWRITERS' WARRANTS AND OPTIONS; RISK OF FURTHER DILUTION. The Company
has agreed to sell to the Underwriters, for nominal consideration, warrants to
purchase up to _________ shares of Common Stock at an exercise price of _______%
of the price at which the Shares are offered to the public (the "Underwriters'
Warrants"). The Underwriters' Warrants and any profits realized by the
Underwriters on the sale of the shares of Common Stock underlying the
Underwriters' Warrants could be considered additional underwriting compensation.
For the life of the Underwriters' Warrants, the holders thereof are given, at
nominal cost, the opportunity to profit from the difference, if any, between the
exercise price of the Underwriters' Warrants and the value of or market price
(if any) for the Shares, with a resulting dilution in the interest of existing
stockholders. The terms on which the Company could obtain additional capital
during the exercise period of the Underwriters' Warrants may be adversely
affected as the holders of the Underwriters' Warrants may be expected to
exercise them when in all likelihood, the Company would be able to obtain any
needed capital by a new placement of securities on terms more favorable than
those provided for by the Underwriters' Warrants. See "Underwriting."
LIMITATIONS ON DIRECTOR LIABILITY. The Company's Certificate of
Incorporation provides, as permitted by governing Delaware law, that a director
of the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, with certain
exceptions. These provisions may discourage stockholders from bringing suit
against a director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of the Company against a
director. In addition, the Company's Certificate of Incorporation and Bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Delaware law. See "Management."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the __________ Shares
offered hereby are estimated to be $______________, or $_____________ if the
Underwriters' Over-allotment Option is exercised in full, after deducting
estimated underwriting discounts, commissions and other offering expenses and
assuming a public offering price of $_________ per Share. The Company intends
to use such net proceeds as follows:
APPLICATION AMOUNT PERCENTAGE
- ----------- ------ ----------
Research and development
of microprocessor technologies(1) $14,624,080
Marketing expenses (2) 1,326,300
Administrative expenses (3) 1,763,700
Repayment of debt (4) 680,000
Working capital (5) ------------ ----------
Total $ 100.00 %
------------ ----------
------------ ----------
Management believes that, based on the Company's current business plan, the
net proceeds of this Offering should be sufficient to provide operating capital
for a period of approximately eighteen (18) months following the date of this
Prospectus. However, there can be no assurance that changes in the Company's
research and development plans or other changes affecting the Company's
operating expenses and business strategy will not result in the expenditure of
such resources before such time or that the Company will be able to generate
revenues prior to such date, or at all, or that the Company will not require
additional financing at or prior to such time in order to continue operations
and product development. There can be no assurance that additional capital will
be available on terms favorable to the Company, if at all. To the extent that
additional capital is raised through the sale of additional equity or
convertible debt securities, the issuance of such securities could result in
additional dilution to the Company's stockholders. Moreover, the Company's cash
requirements may vary materially from those now planned because of results of
research and development, product testing, relationships with manufacturers,
changes in the focus and direction of the Company's research and development
programs, competitive and technological advances, the level of working capital
required to sustain the Company's planned growth, litigation, operating results,
including the extent and duration of operating losses, and other factors. In
the event that the Company experiences the need for additional capital, and is
not able to generate capital from financing sources or from future operations,
management may be required to modify, suspend or discontinue the business plan
of the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and
"Financial Statements."
Pending full utilization of the proceeds of this Offering, the Company may
invest the net proceeds in short-term, investment grade, interest bearing
securities. See "Business."
(FOOTNOTES ON NEXT PAGE)
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(FOOTNOTES FROM PRIOR PAGE)
(1) The Company intends to use these proceeds to continue development of
the Meta 6000 and its related technologies. See "Business."
(2) The Company intends to use these proceeds to hire personnel and cover
expenses related to a marketing program for the Company's products. See
"Business - Sales, Marketing and Distribution."
(3) The Company intends to use these proceeds to pay for administrative
expenses, including administrative salaries, rent, professional fees and other
related expenses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
(4) These amounts are set aside for the repayment of certain indebtedness,
including accrued interest thereon, of the Company owing to certain
non-affiliates of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
(5) This amount may be used for general corporate purposes in connection
with the operation of the Company's business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
16
<PAGE>
DIVIDEND POLICY
No dividend has been declared or paid by the Company since inception on the
Company's Common Stock. The Company does not anticipate that any dividends will
be declared or paid in the future on the Company's Common Stock. See
"Description of Securities."
PRICE RANGE OF COMMON STOCK
As of the date of this Prospectus, the Company had 38,855,941 shares of
Common Stock issued and outstanding. Further, the Company has issued and
outstanding options and warrants to purchase an additional 6,258,748 shares
of Common Stock.
The Company's Common Stock is listed for trading in the Over-The-Counter
Market under the symbol "IMES." In connection with and as a condition of the
closing of this Offering, the Company intends to apply for a listing for the
Common Stock on the NASDAQ/NMS.
The following table sets forth quotations for the bid and asked prices for
the Common Stock for the periods indicated below, based upon quotations between
dealers, without adjustments for stock splits, dividends, retail mark-ups,
mark-downs or commissions, and therefore, may not represent actual transactions:
BID PRICES ASKED PRICES
---------- ------------
HIGH LOW HIGH LOW
---- --- ---- ---
Year Ended December 31, 1995
1st Quarter 1 13/32 5/16 2 5/8 5/8
2nd Quarter 1 1/2 7/8 1 11/16 1 1/32
3rd Quarter 2 31/32 7/8 3 1/16 31/32
4th Quarter 2 3/32 31/32 3 1/8 1
Year Ended December 31, 1996
1st Quarter 2 3/8 1 5/16 2 7/16 1 3/8
2nd Quarter 2 5/16 1 5/8 2 7/16 1 23/32
3rd Quarter 2 7/32 1 5/16 2 5/16 1 1/2
4th Quarter 1 23/32 31/32 1 25/32 1 1/16
Year Ending December 31, 1997
1st Quarter 2 1 1/8 2 1/16 1 1/4
2nd Quarter 1 21/32 15/16 1 11/16 1
On October 21, 1997, the closing market price for the Company's Common
Stock in the Over-the-Counter Market was approximately $ 0.60 per share. As of
_________, 1997, without giving effect to the number of stockholders whose
shares are held in "street name," the Company had approximately ______
stockholders of record. Management believes that the Company had approximately
_________ beneficial stockholders as of ____________, 1997. The Company intends
to effect a reverse split of the Common Stock on a 1-for-_____ basis on the
Effective Date. The market prices for the Common Stock in the tables set forth
above do not give effect to such reverse split and reflect the actual market
prices of the Common Stock during such periods.
17
<PAGE>
DILUTION
The net tangible book value of the Common Stock at June 30, 1997 was
$464,182 or $0.01 per share. Net tangible book value per share is determined by
dividing the Company's tangible net worth (tangible assets less liabilities) by
the 37,668,862 shares of Common Stock outstanding as of such date. Dilution
per share represents the difference between the amount per share paid by the
purchasers of the 38,784,507 shares of Common Stock offered by the Company,
and the pro forma net tangible book value per share of Common Stock immediately
after this Offering.
After giving effect to the sale of ______________ shares of Common Stock
offered by the Company in this Offering, at an assumed public offering price of
$_________ per share, and the receipt of the net proceeds therefrom, and without
giving effect to any other changes since such date, the adjusted net tangible
book value of the Company as of __________, 1997 would have been approximately
$____________ or $_________ per share. This represents an immediate decrease in
net tangible book value of $__________ per share to current stockholders and an
immediate dilution in net tangible book value of $_________ per share to
purchasers of Common Stock to be sold in this Offering, as illustrated in the
following table:
Assumed initial public offering price per share.......... $
--------
Net tangible book value per share at June 30, 1997.... $
-------
Increase in net tangible book value per share
attributable to new stockholders...................
-------
Pro forma net tangible book value after this Offering....
--------
Dilution per share to new stockholders................... $
--------
--------
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<PAGE>
The following table illustrates at June 30, 1997, with respect to existing
stockholders and investors purchasing the ______________ shares of Common Stock
offered hereby, a comparison of the number of shares of Common Stock acquired
from the Company, the percentage ownership of such shares, the total capital
stock and paid in capital contributed, the percentage of total investment and
the average price paid per share:
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
Existing stockholders(2)
New stockholders
All stockholders(3)
______________
(1) The number of shares set forth in this column reflects the number of
shares of Common Stock issued and outstanding as of ___________, 1997. As of
the date of this Prospectus, the Company had 38,855,941 shares of Common Stock
issued and outstanding, and, assuming the completion of this Offering, will have
___________ shares of Common Stock and issued and outstanding, as adjusted.
These numbers give effect to a reverse split of the issued and outstanding
shares of Common Stock on a 1-for-_____ basis to be effectuated by the Company
on the Effective Date of this Offering. See "Description of Securities."
(2) As of the date of this Prospectus, the Company had 38,855,941 shares
of Common Stock issued and outstanding. These numbers give effect to a reverse
split of the issued and outstanding shares of Common Stock on a 1-for-_____
basis to be effectuated by the Company on the Effective Date. See "Description
of Securities."
(3) Does not include shares of Common Stock that are reserved for issuance
upon exercise of the Underwriters' Warrants, or pursuant to certain stock option
plans of the Company, and certain other options, warrants and convertible
securities of the Company. See "Management - Stock Option Plans," "Certain
Relationships and Related Transactions," "Description of Securities" and
"Underwriting."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of: (i)
June 30, 1997, (ii) on a PRO FORMA basis after giving effect to the sale of
71,434 shares of Common Stock and the automatic conversion of the shares of
Series B Convertible Preferred Stock, and (iii) as adjusted to reflect the sale
of the ___________ shares of Common Stock offered hereby, at an assumed public
offering price of $__________ per Share, and an additional financial expense of
$500,000 relating to $2,000,000 of convertible promissory notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Certain Relationships and Related Transactions" and
"Underwriting." This table should be read in conjunction with the financial
statements and related notes included elsewhere in this Prospectus:
JUNE 30, 1997
ACTUAL PRO FORMA AS ADJUSTED(1)
------ --------- --------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value
$0.0001, authorized
1,000,000 shares; issued and
outstanding 250 Series B shares $ 1
Common Stock, par value
$0.0001; 70,000,000 shares
authorized: issued and
outstanding 38,784,507 shares;
____ PRO FORMA(2); ____ as adjusted 3,878
Additional paid-in-capital 18,951,331
Subscription receivable (18,900)
Accumulated deficit (18,320,609)
----------
Total stockholders' equity 615,701
-------
Total capitalization $ 615,701
-------
-------
________________________
(1) Does not include shares of Common Stock that are reserved for issuance
upon exercise of the Underwriters' Warrants, or pursuant to certain stock option
plans of the Company, and certain other options, warrants and convertible
securities of the Company. See "Management - Stock Option Plans," "Certain
Relationships and Related Transactions," "Description of Securities" and
"Underwriting."
(2) As of the date of this Prospectus, the Company had 38,855,941 shares
of Common Stock issued and outstanding, and, assuming the completion of this
Offering, will have ___________ shares of Common Stock issued and outstanding,
as adjusted. This number gives effect to a reverse split of the issued and
outstanding shares of Common Stock on a 1-for-______ basis to be effectuated on
the Effective Date. See "Description of Securities" and "Underwriting."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Prospectus, including the disclosures below, contains certain
forward-looking statements that involve substantial risks and uncertainties.
When used herein, the terms "anticipates," "expects," "estimates," "believes"
and similar expressions, as they relate to the Company or its management, are
intended to identify such forward-looking statements. The Company's actual
results, performance or achievements may differ materially from those expressed
or implied by such forward-looking statements. Factors that could cause or
contribute to such material differences include the factors disclosed in the
"Risk Factors" section of this Prospectus, which prospective purchasers of the
securities offered hereby should consider carefully.
GENERAL
Since the mid-1980's, the Company has been developing and designing
microprocessors for PCs. The pace of technological advancements in PC and
microprocessor technologies during this period has required the Company to
continuously upgrade the Company's microprocessor designs in seeking to develop
a commercially competitive microprocessor concurrently with these advancements.
See "Business - History of the Company."
Since April, 1995, the Company has been developing the Company's
microprocessor designs in conjunction with technical assistance from SGS-Thomson
Microelectronics, Inc., an international semiconductor manufacturer (the
"Manufacturer") to develop and manufacture microprocessor chips for the Company
based on the Company's technology design. See "Business - Licensing and
Production Agreement."
The Company has generated minimal revenues from operations since inception
and no revenues from sales of products since approximately 1990, and has been
engaged primarily in research and development of its products. The Company has
only generated revenues in 1995 and 1996 from certain milestone payments related
to the research and development of the Company's microprocessors. The Company
has incurred net losses in each year since inception, and, as of June 30, 1997,
the Company had an accumulated deficit of $18,320,609. As of the date of this
Prospectus, the financial condition of the Company raises substantial doubts
about the ability of the Company to continue as a going concern. The Company
expects to continue to incur significant operating losses over at least the
following two years as it continues to devote significant financial resources to
product development activities and as the Company expands its operations. In
order to achieve profitability, the Company will have to develop, manufacture
and market products which are accepted on a widespread commercial basis. There
can be no assurances that the Company will develop, manufacture or market any
products successfully, operate profitably in the future or generate revenues
from operations, or that capital in excess of the net proceeds of this Offering
will not be required in order to accomplish the Company's current business plan.
See "Use of Proceeds" and "Financial Statements."
The Company expended approximately $275,000, $666,000 and $3,885,000,
respectively, during the fiscal years ended December 31, 1994, 1995 and 1996,
and $2,782,000 during the six (6) months ended June 30, 1997, on research and
development of the various iterations of the Company's microprocessor designs.
The Company intends to use the proceeds of this Offering to continue to
pursue the development of a prototype for the Meta 6000, and thereafter, a
finished marketable standard Meta 6000 chip. The Company also is devoting its
efforts toward the completion of the development of the Meta 6000 in order to
initiate revenues from the marketing of custom core products based on the design
of the Meta 6000 and a library of individual design elements. See "Use of
Proceeds."
The following discussion reflects the financial condition and results of
operations of the Company for the six (6) month periods ended June 30, 1997 and
1996 and the years ended December 31, 1996, 1995 and 1994.
21
<PAGE>
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996.
Total revenues for each of the six (6) month periods ended June 30, 1997 and
June 30, 1996 were none.
Total operating costs and expenses during the six (6) month period ended
June 30, 1997 increased to $4,734,834 from $2,915,606 during the six (6) month
period ended June 30, 1996. Total operating costs and expenses include: (i)
research and development costs, (ii) selling, general and administrative
expenses, and (iii) depreciation and amortization, as follows:
Research and development expense during the six (6) month period ended June
30, 1997 increased to $2,781,655 from $1,413,286 during the six (6) month period
ended June 30, 1996. This increase primarily resulted from the hiring of
additional engineers and outside consultants for the Company's design center
opened in Austin, Texas late in the fourth quarter of 1995. The Austin design
center was established by the Company for the purpose of developing the
Company's Meta 6000 microprocessor chip.
Selling, general and administrative expenses during the six (6) month
period ended June 30, 1997 increased to $1,837,327 from $1,181,921 during the
six (6) month period ended June 30, 1996. This increase primarily related to
rent and personnel recruiting fees and costs with respect to the establishment
of the Company's Austin design center, taxes and professional fees.
Depreciation and amortization during the six (6) month period ended June
30, 1997 decreased to $115,852 from $320,299 during the six (6) month period
ended June 30, 1996. This decrease primarily resulted from a decrease in
amortization of capitalized software development costs.
The Company experienced an increase in loss from operations during the six
(6) month period ended June 30, 1997 to $4,734,834 from $2,915,506 during the
six (6) month period ended June 30, 1996. This increase primarily resulted from
an increase in research and development costs and selling, general and
administrative expenses related to the establishment of the Austin design
center.
Other income during the six (6) month period ended June 30, 1997 decreased
to $62,106 from $85,342 during the six (6) month period ended June 30, 1996.
This decrease in income between the respective six (6) month periods resulted
primarily from a decrease in dividend and interest income offset, in part, by a
decrease in loss on marketable securities.
As a result of the foregoing, the Company experienced a net loss of
$4,672,728 (or $0.12 per share) during the six (6) month period ended June 30,
1997, as compared to a net loss of $2,830,164 (or $0.09 per share) during the
six (6) month period ended June 30, 1996. See "Liquidity and Capital
Resources."
As a result of the Company's cumulative operating losses, the Company has
not paid income tax since inception. As of December 31, 1996, the Company had
net operating loss carryforwards totalling approximately $15,250,000 and
$__________ for federal and state income tax purposes, respectively.
Utilization of the Company's net operating loss may be subject to limitation
under certain circumstances.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995.
Total revenues for the year ended December 31, 1996 decreased to $300,000 from
$909,988 for the year ended December 31, 1995. All of the Company's revenues
during the year ended December 31, 1996 were generated from payments by the
Manufacturer relating to the achievement of certain milestones by the Company
pursuant to a Licensing and Production Agreement (the "Production Agreement')
for the development of the Company's Meta 6000 microprocessor chip. During the
year ended December 31, 1995, the Company received $900,000 from the
Manufacturer pursuant to the Production Agreement as milestone payments and
payments relating to the grant
22
<PAGE>
to the Manufacturer of a non-exclusive license for the Company's Meta 3250
microprocessor, and an additional $9,988 as consulting fees relating to a
technology study conducted by the Company for Sharp Corporation. The Company
did not generate any revenues from product sales during the years ended December
31, 1996 and 1995.
Total operating costs and expenses during the year ended December 31, 1996
increased to $7,705,795 from $2,625,864 during the year ended December 31, 1995.
Total operating costs and expenses include: (i) research and development costs,
(ii) selling, general and administrative expenses, and (iii) depreciation and
amortization, as follows:
Research and development expense during the year ended December 31, 1996
increased to $3,884,963 from $666,287 during the year ended December 31, 1995.
This increase primarily resulted from the hiring of additional engineers and
outside consultants for the Company's design center opened in Austin, Texas late
in the fourth quarter of 1995. The Austin design center was established by the
Company for the purpose of developing the Company's Meta 6000 microprocessor.
Selling, general and administrative expenses during the year ended December
31, 1996 increased to $2,612,600 from $1,341,964 during the year ended December
31, 1995. This increase primarily related to rent and personnel recruiting fees
and costs with respect to the establishment of the Company's Austin design
center, taxes and professional fees.
Depreciation and amortization during the year ended December 31, 1996
increased to $1,208,232 from $617,613 during the year ended December 31, 1995.
This increase primarily resulted from an increase in amortization of capitalized
software development costs.
The Company experienced an increase in loss from operations during the year
ended December 31, 1996 to $7,405,795 from $1,715,876 during the year ended
December 31, 1995. This increase primarily resulted from an increase in
research and development costs and selling, general and administrative expenses
related to the establishment of the Austin design center in the fourth quarter
of 1995.
Other income during the year ended December 31, 1996 increased to $271,016
from $4,280 during the year ended December 31, 1995. This increase in income
between the respective years resulted primarily from the Company's earning of
$285,120 in dividend income on investments in money market funds relating to
proceeds received from certain private placements conducted by the Company in
1996.
As a result of the foregoing, the Company experienced a net loss of
$7,134,779 (or $0.20 per share) during the year ended December 31, 1996, as
compared to a net loss of $1,711,596 (or $0.06 per share) during the year ended
December 31, 1995. See "Liquidity and Capital Resources."
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994.
Total revenues for the year ended December 31, 1995 increased to $909,988 from
none for the year ended December 31, 1994. During the year ended December 31,
1995, the Company received $900,000 from the Manufacturer pursuant to the
Production Agreement as milestone payments and payments relating to the grant to
the Manufacturer of a non-exclusive license for the Company's Meta 3250
microprocessor chip in connection with the Production Agreement, and an
additional $9,988 as consulting fees relating to a technology study conducted by
the Company for Sharp Corporation. The Company did not generate any revenues
from product sales during the years ended December 31, 1995 and 1994.
Total operating costs and expenses during the year ended December 31, 1995
increased to $2,625,864 from $1,207,068 during the year ended December 31, 1994.
Total operating costs and expenses include: (i) research and development costs,
(ii) selling, general and administrative expenses, (iii) depreciation and
amortization, and (iv) inventory adjustment to market, as follows:
23
<PAGE>
Research and development expense during the year ended December 31, 1995
increased to $666,287 from $275,229 during the year ended December 31, 1994.
This increase primarily resulted from the hiring of additional engineers and
outside consultants at the Company's El Segundo, California corporate
headquarters and at the Company's design center opened in Austin, Texas late in
the fourth quarter of 1995. The Austin design center was established by the
Company for the purpose of developing the Company's Meta 6000 microprocessor
chip.
Selling, general and administrative expenses during the year ended December
31, 1995 increased to $1,341,964 from $710,859 during the year ended December
31, 1994. This increase primarily related to rent and personnel recruiting fees
and costs with respect to the establishment of the Company's Austin design
center, taxes and professional fees.
Depreciation and amortization during the year ended December 31, 1995
increased to $617,613 from $170,864 during the year ended December 31, 1994.
This increase primarily resulted from an increase in amortization of capitalized
software development costs.
Inventory adjustment to market during the year ended December 31, 1995
decreased to none from $50,116 during the year ended December 31, 1994. This
decrease primarily resulted from a write-off of certain obsolete inventory in
1994. In 1995, inventory was minimal and no further write-offs were deemed
necessary.
The Company experienced an increase in loss from operations during the year
ended December 31, 1995 to $1,715,876 from $1,207,068 during the year ended
December 31, 1994. This increase primarily resulted from an increase in
research and development costs and selling, general and administrative expenses
related to the establishment of the Austin design center in the fourth quarter
of 1995.
Other income during the year ended December 31, 1995 decreased to $4,280
from $53,877 during the year ended December 31, 1994. This decrease in income
between the respective years resulted primarily from the receipt of funds in
connection with the settlement of certain litigation in 1994 and a decrease in
net interest income from 1994 to 1995.
As a result of the foregoing, the Company experienced a net loss of
$1,711,596 (or $0.06 per share) during the year ended December 31, 1995, as
compared to a net loss of $1,153,191 (or $0.05 per share) during the year ended
December 31, 1994. See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations principally through
the private placement of equity and debt securities. From January 1, 1995
through June 30, 1997, the Company had raised gross proceeds of $11,345,000
through such private placements. Subsequent to June 30, 1997, the Company has
obtained approximately $2,360,000 in loan financing, including $2,000,000 from
affiliates. The Company continues to require such financing in order to remain
in business.
The Company is in the process of developing microprocessor products for
commercialization and currently does not have any marketable products. Since
inception, the Company has generated nominal revenues from licensing agreements
and providing consulting services.
During the years ended December 31, 1996 and 1995, the Company used an
aggregate of $6,139,057 of cash from operating activities, which primarily was
the result of losses of $7,134,779 and $1,711,596, in each respective year.
24
<PAGE>
Cash and cash equivalents were $44,308 as of June 30, 1997, as compared to
$7,727,248 as of June 30, 1996. This decrease was primarily attributable to the
use of cash in operations and the purchase of marketable securities.
Investments in marketable securities were $533,437, as of June 30, 1997, as
compared to none, as of June 30, 1996. This increase was due to the purchase of
marketable securities by the Company.
As of June 30, 1997, the Company had short-term borrowings in the aggregate
amount of $320,000, an increase from none as of June 30, 1996. The increase was
attributable to the Company's obtaining of a bridge loan during the second
quarter of 1997 following the expenditure of the proceeds of prior equity
financings.
The Company used approximately $5,129,555 and $168,662 of net cash from
investing activities during the years ended December 31, 1996 and 1995,
respectively. Cash outflows from investing activities during these years
resulted from the net purchase of certain marketable securities, the purchase of
furniture and equipment and expenditures related to the processing of
applications for patents. Further, the Company received net cash from investing
activities during the six (6) months ended June 30, 1997 of $3,915,047,
primarily from the sale of marketable securities.
Subsequent to June 30, 1997 through the date of this Prospectus, the
Company's cash flows needs have been met from loans of $2,000,000 from an
affiliate of certain of the Company's principal stockholders and an additional
$360,000 from certain non-affiliates. The Company intends to repay the
obligations owing to such non-affiliates from the proceeds of this Offering.
See "Use of Proceeds."
The Company's auditors have included an explanatory paragraph in their
Report of Independent Certified Public Accountants to the effect that
recoverability of a major portion of the Company's recorded asset amounts shown
in the Company's financial statements is dependent upon continued operations of
the Company, which in turn, is dependent upon the Company's ability to continue
to meet its financing requirements and to succeed in its future operations. See
"Financial Statements."
Management believes that, based on the Company's current business plan, the
net proceeds of this Offering should be sufficient to provide operating capital
for a period of approximately eighteen (18) months following the date of this
Prospectus. However, there can be no assurance that changes in the Company's
research and development plans or other changes affecting the Company's
operating expenses and business strategy will not result in the expenditure of
such resources before such time or that the Company will be able to generate
revenues prior to such date, or at all, or that the Company will not require
additional financing at or prior to such time in order to continue operations
and product development. There can be no assurance that additional capital will
be available on terms favorable to the Company, if at all. To the extent that
additional capital is raised through the sale of additional equity or
convertible debt securities, the issuance of such securities could result in
additional dilution to the Company's stockholders. Moreover, the Company's cash
requirements may vary materially from those now planned because of results of
research and development, product testing, relationships with manufacturers,
changes in the focus and direction of the Company's research and development
programs, competitive and technological advances, the level of working capital
required to sustain the Company's planned growth, litigation, operating results,
including the extent and duration of operating losses, and other factors. In
the event that the Company experiences the need for additional capital, and is
not able to generate capital from financing sources or from future operations,
management may be required to modify, suspend or discontinue the business plan
of the Company. See "Risk Factors."
25
<PAGE>
BUSINESS
GENERAL
The Company designs and develops x86-compatible microprocessors and related
components and designs. A microprocessor is an integrated circuit consisting of
millions of transistors which executes instructions to perform logical and
mathematical operations in electronic devices. Microprocessors serve as the
central processing unit or management/control unit of personal computers ("PCs")
and other electronic devices utilizing microprocessors (collectively,
"microprocessor-based devices"). The microprocessor is responsible for
controlling data flowing through the PC or microprocessor-based device,
manipulating such data as specified by the related operating software, and
coordinating all hardware functions within the system. The demand for higher
performance PCs and microprocessor-based devices has driven advances in circuit
design and large scale integration process technology. Improvements in the
performance of microprocessors, coupled with decreases in costs resulting from
advances in design and process technology, have substantially broadened the
market and increased the demand for PCs, microprocessor-based devices and
microprocessors.
The Company's operating strategy seeks to take advantage of a number of
emerging trends in the PC and microprocessor-based device industries, including:
(i) a focus on the fast growing high performance segments of the PC and custom
core microprocessor markets, (ii) maintaining compatibility with widely accepted
x86 based software standards, (iii) accessing advanced manufacturing
capabilities available by contracting with third-party manufacturers, (iv)
providing hardware compatibility to allow for universal product application, and
(v) utilizing advanced automated design technologies to lower the cost of design
and accelerate the time to market for future versions of its products and
products of its customers.
The Company's marketing strategy is targeted to the high performance
segments of the microprocessor industries. The Company has focused its
marketing strategy on four (4) segments of the market: (i) standard products
which may serve as replacement upgrade microprocessors for installed PCs
which are based on socket-7 pin compatible Pentium-TM- microprocessors
(standard products for microprocessor retrofitting), (ii) customized versions
of standard microprocessors designed for original equipment manufacturers
("OEMs") who desire to integrate x86 compatible custom microprocessors with
their technologies (custom core products), (iii) programmable logic features
for the design or manufacture of custom products (design elements), and (iv)
the technological expertise and capability of the Company's design team for
OEMs to utilize in integrating the Company's custom core products and design
elements into the OEMs' customized technologies (design services).
HISTORY OF THE COMPANY
Since the mid-1980's, the Company has been developing and designing
microprocessors for PCs. The pace of technological advancements in PC and
microprocessor technologies during this period has required the Company to
continuously upgrade the Company's microprocessor designs in seeking to develop
a commercially competitive microprocessor concurrently with these advancements.
The Company's first microprocessor, the Meta 3230, implemented high-level
computer languages, such as Fortran, C and Smalltalk, on PCs. The Company sold
over 200 computer boards containing this chip to the aerospace and defense
industries, but did not penetrate the general PC market because the Meta 3230
did not keep pace with the rapid technology change associated with such market.
26
<PAGE>
In 1989 and 1990, the Company developed the Meta 3240 as a Smalltalk
processor for Apple Computer systems. Smalltalk is an object-oriented computer
language that became popular in the mid 1980's, and was used in many different
system environments. The Company completed a development contract with NCR to
demonstrate the use of this technology in its product line. However, a distinct
market for Smalltalk execution processors did not mature before advances in
technologies developed beyond the design of the Meta 3240.
By 1993, the Company had designed and developed prototype chips (i.e.
silicon encapsulated microprocessors) of the Meta 3250, which were produced by
SGS-Thomson, and the Meta 3250 A&B, that were produced by Texas Instruments.
The design of the Meta 3250 forms the foundation for the Company's current
design of the Meta 6000.
Since April, 1995, the Company has been developing the Company's
microprocessor designs in conjunction with technical assistance from SGS-Thomson
Microelectronics, Inc., an international semiconductor manufacturer (the
"Manufacturer") to develop and manufacture chips for the Company based on the
Company's microprocessor technology design. See "Business - Licensing and
Production Agreement."
The Company expended approximately $275,000, $666,000 and $3,885,000,
respectively, during the fiscal years ended December 31, 1994, 1995 and 1996,
and $2,782,000 during the six (6) months ended June 30, 1997, on research and
development of the various iterations of the Company's microprocessor designs.
The Company intends to use the proceeds of this Offering to continue to
pursue the development of a prototype for the Meta 6000, and thereafter, a
finished marketable standard Meta 6000 chip. The Company also is devoting its
efforts toward the completion of the development of the Meta 6000 in order to
initiate revenues from the marketing of custom core products based on the design
of the Meta 6000 and a library of individual design elements. See "Use of
Proceeds."
INDUSTRY BACKGROUND
During the last decade, the PC industry has grown rapidly as
technological advances and increased functionality, combined with lower
prices, have made PCs valuable and affordable for business and personal use.
The number of PCs sold annually has grown from approximately 200,000 units in
1982 to approximately 100 million units in 1996. PCs comprise the largest
segment of the computer industry, with the largest portion of that segment
being the x86/Pentium-TM- equivalent market. The installed hardware base
utilizing Pentium-TM- equivalent systems is estimated to exceed 100 million
units worldwide.
This large installed base of PCs, together with the popularity of
Microsoft's MS-DOS and Windows operating systems, have resulted in the creation
of a standard environment for PC hardware, software and peripherals. Hardware
manufacturers and software developers are now able to introduce and sell
products based on a set of common specifications or "industry standards" for the
PC market. The proliferation of software written for PCs has served to
reinforce and support these industry standards.
The first PC, introduced by IBM in 1981, used an 8088 microprocessor
designed by Intel. Intel subsequently developed and shipped newer generations
of microprocessors, including the 286 in 1984, the 386 in 1986, the 486 in
1989, and the Pentium-TM- in 1993. These microprocessors, and microprocessors
developed by other companies that run the same instruction set and software,
are commonly referred to as x86 microprocessors. Improvements in
semiconductor manufacturing technology have led to continuous increases in
the operating speed of computers ("clock rates," which are measured in
megahertz, abbreviated as "MHz"). These improvements have further increased
the performance and functionality of each x86 product family, while
maintaining complete hardware, software and peripheral compatibility for
commodity PC systems.
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Through a series of licensing and product agreements, Intel encouraged
others to manufacture its earliest x86 microprocessors (8088, 8086 and 286),
thereby accelerating acceptance of this architecture in the marketplace. Intel
did not, however, establish alternative suppliers for the 386 or subsequent
generations of its microprocessors. For five years, Intel was the sole supplier
of 386 microprocessors, and for three years, Intel was the sole supplier of 486
microprocessors. This situation created an interest from PC manufacturers for
alternative microprocessor suppliers to provide price competition and assure
availability.
In its original x86 design, Intel's microprocessor designers chose an
architectural approach that required a large number of instruction sets and
complex hardware to perform its internal operations. This approach, referred to
as "complex instruction set computing" ("CISC"), has been used by Intel in each
subsequent generation of its x86 microprocessors. The x86 instruction set
consists of a large number of instructions of uneven length, which consequently
requires more than one clock cycle to execute.
In an effort to achieve higher performance microprocessors, workstation
designers developed an architectural approach that required a smaller number of
simplified instructions to perform their internal operations. This approach,
referred to as "reduced instruction set computing" ("RISC"), reduced both the
number of types and complexity of instructions in order to execute at the rate
of one instruction per clock cycle.
A significant barrier to entry into the PC microprocessor market is the
need for a microprocessor to run a wide range of PC software applications
without sacrificing performance. This has led to only a few manufacturers'
attempting to challenge Intel's dominance of the x86 microprocessor market by
introducing products that are compatible with x86 software. Since 1991, AMD,
Cyrix, IBM and others have introduced 386, 486 and more recently, Pentium-TM-
class microprocessors. In recent years, the non-Intel x86 microprocessors
have achieved significant market acceptance, particularly in segments of the
PC market where they provide price, performance and availability advantages.
However, due to the significant design challenges and high costs associated
with developing microprocessors, to date, competitors have been unable to
introduce leading edge products on the same schedule as Intel.
Intel's response to this increased competition has been to continue to
introduce new microprocessors with even higher performance, including the
Pentium-Pro-TM- with MMX-TM- (multimedia extensions) technology in 1997 and
more recently, the Pentium II-TM- processors, which require a complete
redesign of the computer motherboards to accommodate a new Slot-1 cartridge,
as opposed to the previous socket-7 cartridge. Intel also has employed a
pricing strategy of making frequent and significant price reductions to
stimulate market demand and encourage the migration of OEMs and end users to
their latest generation of microprocessors. Intel's new microprocessors have
achieved rapid market growth because end-users of PCs continue to demand
those products with the highest performance.
The establishment of hardware and software standards and the emergence of
numerous PC suppliers have caused the PC industry to be extremely competitive,
with short product lifecycles, limited product differentiation and substantial
price competition. To compete more effectively, many PC suppliers have evolved
from fully integrated manufacturers of proprietary system designs to resale
vendors focused on building brand recognition and distribution capabilities.
Many of these suppliers now rely on third-party manufacturers for the major
subsystems of their PCs to incorporate the latest features and performance at
low prices. Increasingly, these suppliers are also selling PC systems through
alternative distribution channels. Historically, these resale suppliers have
had periods of difficulty in obtaining adequate supplies of the highest
performance microprocessors. Consequently, they also represent a significant
source of demand for alternatives to Intel products.
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PRODUCTS
META 6000. The Meta 6000 is a microprocessor in the course of being
developed based on the Company's proprietary microarchitecture. The Meta 6000
employs a superscalar structure to enhance performance and is based on RISC
performance principles to implement standard x86 instruction sets. This
advanced superscaler architecture is being designed to execute x86 programs at
higher clock rates. The superscalar structure of the Company's microprocessor
design includes the following features:
SUPERSCALER EXECUTION. Superscalar execution is a method by which the
microprocessor executes multiple instructions in parallel using
independent execution units. This technique allows microprocessors to
operate faster than the early RISC objective of one cycle per instruction.
BRANCH PREDICTION. Branch prediction is a method by which a processor
may continue to fetch instructions from the most likely execution path
without having to wait for the completion of other pending instructions.
SPECULATIVE EXECUTION. Speculative execution is an advanced
capability by which instructions fetched using branch prediction are
executed by the microprocessor before it is known whether the selected
execution path of a program will use those instructions, thereby increasing
performance. A necessary companion capability is called backout, which
enables the microprocessor to undo instruction executions if the branch
prediction was incorrect.
REGISTER RENAMING. Register renaming is an advanced technique whereby
the microprocessor physically implements more general purpose registers
than are specified in the x86 instruction set. These additional registers
are then used to relieve register usage bottlenecks which develop in
program code, thereby increasing performance.
OUT-OF-ORDER EXECUTION. Out-of-order execution is a technique that
allows instructions to be executed in an order different from that
specified by the program in order to increase performance. The basic
technique is to allow instructions to execute as soon as the operands (i.e.
data values) for the instruction are available. In this way, an
instruction that comes later in a program instruction stream, but whose
operands are ready, can execute without waiting for an instruction that
came earlier in the instruction stream, but whose operands are not yet
available.
DATA FORWARDING. Data forwarding is a technique whereby the results
of one instruction are made available as the inputs of other instructions
without waiting for registers or memory locations to be updated and read
back, which is the case when this technique is not used.
Microprocessors are connected to the PC motherboard through metal pins. A
microprocessor is designed to have a certain "pinout," or specification of
number, orientation, and definition of specific pin functions. PC motherboards
are then designed to be able to accept the pinout of a microprocessor.
Microprocessors that have identical pinouts are said to be "pin-compatible"
because they can fit into the same slot on a motherboard.
The Meta 6000 chip is being designed to provide at least comparable
performance, in certain material respects, to similarly configured systems
based on Intel's current Pentium-TM- design utilizing: (i) socket-7, zero
insertion force ("socket-7") connectors to maintain pin-to-pin hardware
compatibility with an existing large installed hardware base of approximately
100 million PCs, and (ii) the industry standard x86 instruction sets to
maintain compatibility with an existing large installed base of software and
peripherals which have been developed for the PC. Further, the Company is
developing the Meta 6000 chip to perform at clock rates comparable to Intel's
recently introduced Pentium II-TM- chip, as opposed to the lower clock rates
of the
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previously introduced Pentium-TM- chip, and to provide on-chip multimedia
execution capabilities ("MMX"), such as sound, graphics and voice
compression, compatible with Intel MMX-TM- architecture at the higher clock
rate.
Intel's Pentium II-TM- has been designed to utilize a slot-1 cartridge
connector which requires the use of replacement motherboards with compatible
connector slots for hardware compatibility. This design modification differs
from the socket-7 connector utilized with the Pentium-TM-. The Company's
current objective is to design the Meta 6000 as a retrofitting or replacement
chip with socket-7 connectors, which performs at higher clock speeds than
Intel's prior generation Pentium-TM-, to owners of PCs who may desire to
upgrade their PCs by purchasing a replacement chip rather than an entire
replacement motherboard with a Pentium II-TM- chip or a new computer.
The Company estimates there are over 100 million socket-7 PCs in use
today. With the initiation of the slot-1 cartridge in Intel's newly
introduced Pentium II-TM- systems, which have higher performance levels than
the Pentium-TM- systems, the Company believes that a market may develop in
socket-7 pin compatible replacement microprocessors with performance levels
comparable to Pentium II-TM- microprocessors. However, there can be no
assurances that such a market will ever develop.
The Company has produced a tape-out of a test chip (i.e. a silicon chip
containing key elements of the microprocessor's design, but not a complete or
final production chip) for the Meta 6000 developed for manufacture with a 0.35
micron CMOS wafer fabrication process, and continues to work to develop a
tape-out of the complete Meta 6000 design using the emerging industry standard
0.25 micron CMOS wafer fabrication process. A "tape-out" is the delivery to a
proposed manufacturer of a design of the microprocessor which has been validated
by industry standard design tools, and which thereafter may be integrated into a
silicon prototype or production chip. In order to develop a marketable chip,
the Company will need to develop a manufacturing prototype of the Meta 6000, the
performance of which must be certified by independent industry testing
organizations (i.e. XXCAL) and existing manufacturers to demonstrate software
and hardware compatibility with existing broad-based distributed PC products.
The Company intends to use a significant portion of the proceeds of this
Offering to continue the development of the Meta 6000.
The Company's Meta 6000 is anticipated to be manufactured by the
Manufacturer under a long-term agreement signed in April, 1995, using the
Manufacturer's 0.25 micron CMOS, 6-layer metal, 8" wafer fabrication process and
advanced package technologies. The Company believes its strategy of using
outside manufacturers will allow it to minimize its capital requirements while
focusing on design expertise. The Company also intends to explore strategic
relationships with other semiconductor manufacturers who possess
state-of-the-art production facilities and process technologies.
In future implementations of the Meta 6000, the Company intends to increase
operating frequency and reduce the die size of its processor. Additionally,
future implementations of the Company's microprocessors are being targeted to
include an ultra-high performance chip that supports the industry's leading
programming and applications paradigms, such as Java, which are currently used
on the Internet. However, there can be no assurances that the Company will be
able to develop and market more advanced designs of the Company's
microprocessors.
CORE MICROPROCESSORS. The Company intends to reuse portions of the
proprietary core architecture of the Meta 6000 for custom designed
microprocessors which are integrated with proprietary designs and technologies
of other customers. Management believes that this core may be integrated with
components of larger computerized systems, on a customized basis, in order to
assist other manufacturers to develop high quality, cost competitive products in
their market segments.
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The Company intends to offer its technology and design services, together
with the expertise of the Company's engineers, to assist in product development,
and further, to create and service a market for custom microprocessors based on
the Company's x86 compatible core design. See "Products - Design and
Engineering Support of the Sale Process."
The Company believes that significant market opportunities exist for
suppliers other than Intel that can provide high performance core processors
with x86 software compatibility to support the installed base of software for
PCs, particularly if such suppliers can provide products that enable a
competitive advantage in cost or time to market for manufacturers in their
market segments.
LIBRARY COMPONENTS. The Company has developed a proprietary library of
individual circuits and cells containing groups of these circuits, which
individually constitute marketable design elements for applications within other
technologies. The Company believes that these library components may be
utilized by other manufacturers as components of their own proprietary
technologies.
The Company's library consists of approximately 200 proprietary individual
circuits, including iterations of each component for different applications
within given circuits. These circuits include adders, buffers, flip-flops,
inverters, latches and other proprietary macrocells based on the integration of
these circuits into larger components.
The Company has initially targeted manufacturers of programmable logic,
digital signal processors and high performance graphic accelerators as potential
markets for the application of the Company's proprietary library components.
The Company's library components are currently available for application in 0.35
micron processes, and the Company continues to develop these library components
for application in the newer 0.25 micron processes. Most of these target
manufacturers do not yet have complete 0.35 micron libraries, and even fewer
have 0.25 micron libraries.
Management believes that the market for high performance component
libraries is growing and will continue to grow rapidly. The continuing shortage
of integrated circuit designers and the rapid, world-wide growth in new foundry
capacity has created a substantial market for high performance component
libraries. The Company expects to expand its component library by incorporating
custom circuits developed under contract with customers utilizing its
microprocessor core products. In addition, as library components are upgraded to
newer, smaller fabrication processes, the next generation library will be
established. Management believes that this strategy will enable the Company to
provide technology upgrades to customers as their needs dictate.
DESIGN AND ENGINEERING SUPPORT OF THE SALES PROCESS. During the course of
the development of the Company's microprocessor technologies, the Company
assembled a staff of approximately 40 engineers, including 28 engineers with
advanced graduate degrees (including 7 PhDs), who have technological expertise
in the design of microprocessors and related technologies. This organization
has created a resource from which to market the design and development service
capabilities of the Company to manufacturers on an independent contractor basis.
The Company also has accumulated a sophisticated design system consisting of
both proprietary industry standard and computer-aided engineering tools to
facilitate product design, simulations and compatibility testing. The Company
intends to utilize the experience and skills of its engineering staff and its
software tools and processes to design and develop high-performance,
cost-effective designs for other manufacturers.
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The Company also intends to offer these design and development services in
conjunction with the marketing of its core microprocessors and design elements,
which require integration into other systems. This market plan is intended to
create additional markets for the Company's products by engineering the
integration of the Company's proprietary technologies as a component of products
or processes of other manufacturers.
BUSINESS STRATEGY
The Company's operating strategy seeks to take advantage of a number of
emerging trends in the PC and microprocessor-based device industries, including:
(i) a focus on the fast growing high performance segments of the PC and custom
core microprocessor markets, (ii) maintaining compatibility with widely accepted
x86 based software standards, (iii) accessing the most advanced manufacturing
capabilities available by contracting with third-party manufacturers, (iv)
providing complete hardware compatibility to allow for universal product
application, and (v) utilizing advanced automated design technologies to lower
the cost of design and accelerate the time to market for future versions of its
products and products of its customers.
DEVELOP PRODUCTS FOR THE HIGH PERFORMANCE SEGMENT OF THE PC MARKET. The
Company is developing advanced x86 processors, which are not currently available
to market, for the high performance segments of the PC and custom core markets.
These segments of the market have grown rapidly as more advanced software
applications are introduced by others and end-users continue to demand
increasingly faster systems. In late 1996, microprocessors with on-chip,
multimedia instruction execution capabilities were introduced by others. The
Company expects the continuing introduction of software applications by others
that will optimize the features of the multimedia-enabled chips. As these
introductions occur the demand for high performance multimedia enabled devices
is expected to increase.
MAINTAIN COMPATIBILITY WITH PC INDUSTRY STANDARDS. The Company's intends
to develop processors that are compatible with existing PC industry standards.
The Company's proprietary microarchitecture is being designed to maintain
compatibility with PC software, hardware and peripherals. The Meta 6000 custom
core and selected design elements are being developed to be hardware compatible
with existing PC standards, such as socket-7 connectors.
ESTABLISH STRATEGIC MANUFACTURING RELATIONSHIPS. The Company has
established a strategic relationship with the Manufacturer, which possesses
state-of-the-art production facilities and process technologies. The Company
believes this strategy allows it to minimize its capital requirements while
focusing on its design expertise. The Company intends to negotiate with
additional manufacturers to obtain multiple sources for its processors and
related system products.
DEVELOP FUTURE PRODUCTS UTILIZING ADVANCED AUTOMATED DESIGN TECHNOLOGIES.
The Company is currently developing and plans to introduce future generations of
x86 processors. The Company has developed a sophisticated design database and
software engineering process which it believes will enable it to develop higher
performance, lower power consumption versions of the Meta 6000, as well as
future generations of microprocessors. The core architecture of the Meta 6000
enables the Company's engineers to develop and enhance elements of the processor
individually. The Company believes that the modular nature of its microprocessor
architecture will result in lower cost of design and accelerated time to market
for future versions of its products, such as the custom core and derivative
design elements, due to the reusability of its modular components.
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LICENSING AND PRODUCTION AGREEMENT
In April, 1995, the Company entered into a License and Production Agreement
(the "Production Agreement") with the Manufacturer, which provides for the
development by the Company, together with the Manufacturer, of the Meta 6000 and
certain related technologies. The Manufacturer has cross-licensed United States
patent portfolios with Intel, thereby providing legal protection for the Company
to develop, manufacture and distribute x86 compatible microprocessors. The
Company granted to the Manufacturer a perpetual, exclusive worldwide license to
make, use or sell the Meta 6000 chips and a perpetual, nonexclusive worldwide
license to make, use or sell the Meta 3250 and 3280 chips. The Manufacturer has
agreed to pay certain royalties to the Company from sales (net of taxes,
returns, insurance and freight) of chips and other related products and has
granted back to the Company certain rights to manufacture and sell chips under
the Company's own brand name. No assurance can be given that even if one or more
of the Company's chips is developed to the point of being ready for manufacture
and sale that the Manufacturer will be both willing and able to exploit such
chips in the market. Pursuant to the Production Agreement, the Manufacturer has
agreed to provide to the Company: (i) development funding in the amount of up to
$2.5 million based on and subject to the timely achievement of certain
development objectives for the related technology, (ii) technical assistance
from personnel employed by the Manufacturer, and (iii) the use of certain
specialized capital equipment and software owned by the Manufacturer (up to a
total cost of $1.5 million), all for the development of certain of the Company's
microprocessors. In addition, at various stages in the development process of
the Meta 6000, and subject to the achievement of certain milestones in the
Production Agreement, the Manufacturer has agreed to provide prototyping for the
Meta 6000 (i.e. design rules, manufacturing assistance and prototype silicon
wafers) to the Company. No assurance can be given that the Company will achieve
the particular milestones entitling it to such wafers, or that the receipt
thereof will result in completing the Meta 6000 or generating revenue or result
in profitability to the Company. See "Use of Proceeds."
Under the Production Agreement, the Manufacturer has granted back to the
Company a license to make, use or sell the Meta 6000, subject to the Company's
performance of certain milestones under the Production Agreement. Such right
does not permit the Company to sublicense or to contract with other foundries to
manufacture the Meta 6000, except under certain limited circumstances. Thus, to
the extent that the Company wishes to sell the Meta 6000, the Company will
effectively depend on the timely and adequate production of Meta 6000 chips by
the Manufacturer for inventory, on terms to be negotiated between the Company
and the Manufacturer. The Production Agreement provides that if the Manufacturer
is unable or unwilling to provide the Company with adequate amounts of Meta 6000
chips, the Manufacturer has agreed to permit, under certain conditions, the
Company to contract with other manufacturers to produce Meta 6000 chips bearing
the Company's own brand name, but will not permit the Company to license other
manufacturers to produce Meta 6000 chips under such other manufacturers' own
name. No assurance can be given that the Company will be able to contract with
other manufacturers to manufacture chips and to market such chips under such
circumstances. As a consequence, the sale by the Company of Meta 6000 chips
manufactured by other manufacturers, except as a result of the Manufacturer's
being unwilling or unable to provide adequate inventory will reduce the
Company's right to receive royalties on sales of such products by the
Manufacturer, on a unit for unit basis.
The Production Agreement provides that the Company must meet certain
progress milestones in the development of the Meta 6000 and related technology.
Further, the payment of development funding is to be made in installments, with
each installment contingent upon the satisfaction by the Company of a particular
milestone. If the Company is in default of the timely achievement of a
milestone and such default is not cured within thirty days thereafter, even if
such failure is not the fault of the Company, the Manufacturer will have the
right to terminate the Production Agreement. In this circumstance, the Company
will lose all its rights to use any of the technology provided by the
Manufacturer to continue development of the Meta 6000. However, the
Manufacturer will retain the right to use technology developed by the Company,
which the Manufacturer may use to continue development on products which may
directly compete with any products which may eventually be developed by the
Company alone. In addition, the Company will have no further right to the
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receipt of additional development funding or technical support from the
Manufacturer with respect to the development of its technology. No assurance
can be given that the Company will comply with the schedule of milestones in a
timely manner, or that if it does, that the Production Agreement will result in
the generation of revenues to the Company. As of the date of this Prospectus,
the Company has received $1,050,000 from the Manufacturer. Certain of the
milestone objectives must be met by time-specific deadlines, and other milestone
objectives must be met by certain achievement-specific deadlines. The
achievement-specific milestones include the delivery of various stages of chip
design and related technology to the Manufacturer. The Company has met certain
of these milestones, but still must meet certain time-specific deadlines. There
can be no assurance that the Company will meet all of the milestones in a timely
manner, or at all, or develop any product to the point of being ready for
manufacture and sale.
SALES, MARKETING AND DISTRIBUTION
The Company's primary marketing and sales objective is to achieve sales
revenue by developing a diversified customer base for its technology by
customizing its x86 core processor for various applications and offering the
library of design elements derived from the development of the Meta 6000, and
marketing a Meta 6000 chip as a retrofit to PCs utilizing Pentium-TM- chips with
socket-7 connectors.
Because the Company does not currently have a marketable microprocessor,
the Company has targeted its initial marketing efforts on selling its existing
library of design elements to various technology vendors in order to gain market
penetration and name recognition for the Company.
The Company will require substantial efforts and the expenditure of
significant funds to establish market acceptance and name recognition of the
Company and its proposed products and technologies in the high technology
industry and among end users, OEMs and value added resellers. The Company
intends to use a portion of the proceeds of this Offering to continue
development of its marketing program relating to the Company's proposed
products.
The Company does not currently contemplate that it will directly have the
ability to manufacture any of its products for the foreseeable future, but
instead intends to commercialize its products and their related technology
through direct licensing arrangements with third party manufacturers. However,
the Company may, if the opportunity arises, enter into joint ventures or
strategic alliances with other parties engaged in the marketing or manufacture
of computer systems or computer components. The Company believes that this
strategy will allow it to avoid many of the significant capital costs ordinarily
associated with the manufacturing of computer products.
The Company's target markets for its products range from owners of existing
PCs that are suitable for upgrade to large companies that may integrate the
Company's proprietary designs into their specific product applications. The PC
and PC products marketplace is characterized by a very high degree of
standardization, allowing an equally high degree of compatibility of
sub-assembly products within different PC applications. The Company's goal is
to create such compatible microprocessor designs to provide custom solutions for
various x86 market segments.
Presently, the Company's management and a marketing consultant serve as
interfaces with potential customers, pursuing discussions of product orders and
various strategic relationships. However, as the Company furthers development
of the Meta 6000 and its related technologies, the Company intends to develop a
larger sales organization.
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The Company intends to use a portion of the proceeds of this Offering to
hire a director of sales, a field applications engineer and two additional sales
personnel. This initial sales organization will be responsible for identifying,
evaluating and engaging sales representative organizations throughout strategic
metropolitan areas of the United States. The primary function of the Company's
representatives will be to sell products to a specific industry or market. The
representatives selected by the Company will need to be well-versed in their
market and the territory they will be covering, know the individual employees of
the customer and be aware of the requirements for selling to that specific
organization. The Company intends to expand this sales organization by
establishing regional sales offices and franchised distributors, as the volume
of sales of products may justify. See "Use of Proceeds."
The Company intends to establish additional marketing and sales programs to
generate sales of its standard chips, microprocessor core products and design
elements, as they are developed. The Company intends to establish a network of
independent sales representatives to reach large volume purchasers and a larger
direct sales organization to target OEM accounts.
COMPETITION
The market for the Company's proposed products is extremely competitive.
The Company directly and indirectly competes with other businesses, including
businesses in the computer microprocessor industry. In many cases, these
competitors are substantially larger and more firmly established than the
Company. In addition, many of such competitors have greater marketing and
development budgets and substantially greater capital resources than the
Company. Accordingly, there can be no assurance that the Company will be able
to achieve and maintain a competitive position in the Company's industry.
Further, in order to compete effectively in the market for high performance
x86 microprocessors and related technology, the Company must develop and
introduce on a timely basis competitive products that embody new technology,
meet evolving industry standards, and achieve competitive levels of
performance at prices acceptable to the market. In particular, the market
for microprocessor products has been and continues to be characterized by
intense and increasing price competition, even for the most advanced
microprocessor products. Intel has increasingly made more frequent and more
significant price reductions to stimulate market demand for its Pentium-TM-
processors and encourage migration of OEMs and end users to its latest
generation of processors.
The Company's competitors in the market for x86 microprocessors include
Intel, Advanced Micro Devices, Inc. ("AMD"), and National Semiconductor
(which recently acquired Cyrix) and others with substantially greater
resources in technology, finance, manufacturing, sales, marketing,
distribution, customer service and support, as well as greater experience and
name recognition, than the Company. Intel, in particular, has long had a
dominant position in the market for microprocessors used in PCs. Intel's
dominant market position has, to date, allowed it to set standards and thus
dictate the type of product the market requires of Intel's competitors. The
Company believes that the Meta 6000 will need to be competitive primarily
with Intel Pentium-TM- microprocessors. It is expected that Intel will
introduce faster versions of the Pentium-TM- and that other companies will
continue to develop competitive technologies. Intel has announced the
architecture and technology of its next generation processor. AMD has
announced that it has begun the shipment of its sixth generation product and
Cyrix has announced it intends to begin shipping its new microprocessor
product. The Company expects substantial direct competition, both from
existing competitors and from new market entrants.
Further, larger and more established competitors may seek to impede the
Company's ability to establish a market share for any products which may be
developed by the Company through competitive pricing activities. Also,
prospective customers for the Company's products may be reluctant to disrupt
relationships with well-established distributors of products which may be
comparable in quality or pricing to any of the Company's products.
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Further, the Company's competitors spend substantial sums on research and
development, manufacturing facilities, and intensive advertising campaigns
designed to engender brand loyalty among PC end-users in order to maintain their
respective market positions. The Company does not have comparable resources
with which to invest in research and development and advertising and is at a
competitive disadvantage with respect to its ability to develop products. The
Company may also encounter difficulties in customer acceptance because it is
likely to be perceived as a new processor supplier whose identity is not yet
well known and whose reputation and commercial longevity are not yet
established. Substantial marketing and promotional costs, possibly in excess of
what the Company can afford, may be required to overcome barriers to customer
acceptance. There can be no assurance that the Company will be able to overcome
such barriers. The failure to gain customer acceptance of the Meta 6000 and
related technology would have a material adverse effect on the Company. So long
as Intel remains in this dominant position, its product introduction schedule
and product pricing will materially, and at times adversely, affect the
Company's business and financial condition.
PATENTS AND TRADEMARKS
The Company regards its technological processes and product designs as
proprietary and seeks to protect its rights in them through a combination of
patents, internal procedures and non-disclosure agreements. The Company also
utilizes licenses from third parties for processes and designs used by the
Company which are proprietary to other parties. The Company believes that its
success will depend in part on the protection of its proprietary information and
patents, and the licenses of technologies from third parties.
The Company has been issued a United States patent (No. 5,574,927) which
relates to the proprietary microarchitecture for the Company's core
microprocessor technology.
There can be no assurances as to the range or degree of protection any
patent or registration which may be owned or licensed by the Company will
afford, that such patents or registrations will provide any competitive
advantages for the Company, or that others will not obtain patents or
registrations similar to any patents or registrations owned or licensed by the
Company. There can be no assurances that any patents or registrations owned or
licensed by the Company will not be challenged by third parties, invalidated,
rendered unenforceable or designed around, or that the Company's competitors
will not independently develop technologies which are substantially equivalent
or superior to the technologies owned or licensed by the Company and which do
not infringe patents or proprietary rights of the Company. Further, there can
be no assurances that any pending patent or registration applications or future
applications will result in the issuance of a patent or registration. There can
be no assurances that the Company or any licensor to the Company will be
successful in protecting its proprietary rights. No assurances can be given
that the technology owned or licensed by the Company will not infringe on
patents or proprietary rights of others, or that the Company can obtain or renew
licenses to use such proprietary rights, if necessary.
To the extent that the Company relies upon trade secrets and unpatented
know-how, and the development of new products and improvements of existing
products in establishing and maintaining a competitive advantage in the market
for the Company's products and services, there can be no assurances that such
proprietary technology will remain a trade secret or be available to the
Company, or that others will not develop substantially equivalent or superior
technologies to compete with the Company's products and services.
Any asserted claims or litigation to determine the validity of any third
party infringement claims could result in significant expense to the Company or
any licensor of such technology and divert the efforts of the Company's
technical and management personnel, whether or not such litigation is resolved
in favor of the Company or any such licensor. In the event of an adverse result
in any such litigation, the Company or any such licensor could be required to
expend significant time and resources to develop non-infringing technology or to
obtain licenses to the disputed technology from third parties. There can be no
assurances that the
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Company or any such licensor would be successful in such development or that any
such licenses would be available to the Company on commercially reasonably
terms, if at all.
EMPLOYEES
As of September 30, 1997, the Company had approximately 50 full-time
employees, including 33 employees in the Company's Texas design center and 17 in
the Company's California corporate offices. These employees include technical,
administrative and clerical personnel. The Company also has engaged 17
consultants to perform services as independent contractors related to the
Company's business operations. The Company intends to hire additional personnel
as the development of the Company's business makes such action appropriate. The
loss of the services of such key employees as George W. Smith and Lee W. Hoevel
could have a material adverse effect on the Company's business. Since there is
intense competition for qualified personnel knowledgeable of the Company's
industry, no assurances can be given that the Company will be successful in
retaining and recruiting needed personnel. See "Management - Key Person
Insurance Policies."
The Company's employees are not represented by a labor union or covered by
a collective bargaining agreement, and the Company believes it has good
relations with its employees. The Company provides its employees with certain
benefits, including health insurance.
PROPERTIES
The Company leases an approximately 7,955 square foot facility located at
100 North Sepulveda Boulevard, Suite 601, El Segundo, California from an
unaffiliated third party. This facility serves as the Company's executive
headquarters and as a research and development facility. The Company pays
$8,353 per month on a lease which expires in May, 2001. The Company also
currently leases an approximately 8,205 square foot facility located at 7718
Woodhollow Drive, Suite 1150, Austin, Texas from an unaffiliated third party.
This facility serves as a research and development facility. The Company pays
$9,723 per month on this lease which expires in February, 1999.
LITIGATION
The Company knows of no material legal actions, pending or threatened, or
judgments entered against the Company or any officer or director of the Company
in his capacity as such.
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MANAGEMENT
The Company's Restated Certificate of Incorporation provides that at the
first annual meeting of the Company's stockholders after the authorized number
of directors is six (6) or more, the Board of Directors shall be divided into
three (3) classes with staggered terms, Class I, Class II and Class III. As the
Company's Bylaws provide that the authorized number of directors shall be not
less than three (3) members and not more than eleven (11) members, the Board of
Directors has been divided into the three (3) classes.
The Company currently has seven (7) directors who serve staggered terms, as
follows: (i) CLASS I - two (2) directors serve for one-year terms; (ii) CLASS II
- - two (2) directors serve for two-year terms; and (iii) CLASS III - three (3)
directors serve for three-year terms, or, in each case, until a successor has
been duly elected and qualified.
The Board of Directors met five (5) times during the year ended December
31, 1996. All directors standing for reelection attended 100% of the meetings
of the Board, except for Frank LaChapelle and Masahiro Tsuchiya, who attended
three (3) and four (4) meetings, respectively.
Officers serve at the discretion of the Board of Directors. There are no
family relationships among any of the Company's directors and executive
officers.
NAME POSITION AGE
---- -------- ---
CLASS I (ONE-YEAR TERM)
George W. Smith Director, Chief Executive Officer 58
and Chief Financial Officer (acting)
Sigmund Hartmann Director 68
CLASS II (TWO-YEAR TERM)
Frank LaChapelle Director 55
Philip Neches Director 45
CLASS III (THREE-YEAR TERM)
Martin S. Albert Chairman of the Board of Directors 64
Lee W. Hoevel Director, President and Secretary 47
Masahiro Tsuchiya Director 47
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GEORGE W. SMITH, Director and Chief Executive Officer, has served the
Company in these offices since election by the shareholders in December, 1988.
He has served as the Company's acting Chief Financial Officer since April 3,
1997. Prior to December, 1988, he founded the entity which entered into a
reorganization agreement with the Company on December 31, 1988, and served as
its President and Chief Executive Officer and Director from its inception in
December 1985 until December 31, 1988. From October, 1967 to August, 1985, he
was employed by the Aerospace Corporation, where his positions included
Principal Director for DOD Space Shuttle Operations and Systems Director for
Development and Operations of several classified Air Force programs. While
employed by the Aerospace Corporation, he managed programs with budgets
exceeding $300 million. He has an extensive background in managing the design,
development and manufacturing of complex high-tech products. His awards include
the Trustees' Distinguished Achievement Award granted by the Aerospace
Corporation in recognition of his technical leadership and management and the
Air Force Outstanding Service Award. He received a Bachelor of Science degree
in electrical engineering from the University of Nevada and has performed
graduate work at U.C.L.A.
SIGMUND HARTMANN has served as a Director since August, 1995. He has
previously held the positions of Vice President and Assistant General Manager of
TRW Incorporated, President, Software Division of Commodore Business Machines,
and President of Software of Atari Corporation. At Commodore, Mr. Hartmann
directed the company from a $300 million, low end computer business to a $1.2
billion systems company. At Atari, he reversed the fortunes of that entity from
losing $500 million a year to a profitable operation. Mr. Hartmann currently
serves as a consultant to the Company. See "Certain Relationships and Related
Transactions."
FRANK LACHAPELLE has served as a Director since September, 1993. He is a
founder of Interscience Computer Corporation and has served as the Chairman of
the Board since its formation in 1983. Mr. LaChapelle served as President of
Interscience Computer Corporation from 1983 until January, 1991, and has served
as Chief Executive Officer since September, 1991. Interscience Computer
Corporation filed for protection under Chapter 11 of the U.S. Bankruptcy Act on
March 6, 1997.
PHILIP NECHES has served as a Director since November, 1996. He has
previously held positions as Founder, Chief Scientist and Vice President,
Teradata Corporation, Sr. Vice President and Chief Scientist, NCR Corporation
and Vice President and Group Technical Officer, Multimedia Products and
Services, AT&T Corporation. At present, Dr. Neches is an outside consultant and
investor in several companies. Dr. Neches holds a Bachelor of Science degree
(with honors) from the California Institute of Technology, a Masters Degree in
Engineering Science from the California Institute of Technology and a Ph.D. in
Computer Science from the California Institute of Technology.
MARTIN S. ALBERT has served as a Director since March, 1996, and as
Chairman of the Board of Directors since August 1, 1997. He is the President
and Chief Executive Officer of Dolphin Interconnect Solutions, Inc. ("Dolphin"),
a stockholder of Amerscan, A.S., Dolphin's largest stockholder, and has been a
director of Dolphin since its incorporation. He is a director of Paragon
Capital Management LLC, the sole general partner of Paragon Limited Partnership,
a principal stockholder of the Company. He is also a director and Deputy
Chairman of Amerscan Capital Management, Ltd., the general partner and
investment advisor of Amerscan Partners III, Limited Partnership. He is also a
director of Scada, Inc. Mr. Albert has a bachelor's degree in Physics from the
City College of New York and carried out post graduate studies in Philosophy of
Science and Business at the University of California, Los Angeles and Columbia
University. He has previously been involved in corporate investment and
consultancy work and has served as a director of numerous companies,
particularly being involved with a number of small-to medium sized technology
companies seeking funding to expand their strategic and operational
capabilities. He has also been involved in developing and managing disk-drive
test and development systems companies and other companies involved in computer
disk and tape technologies. Mr. Albert has led several high technology
companies through their
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original public offerings and oversaw their future acquisition by substantially
larger firms. See "Certain Relationships and Related Transactions."
LEE W. HOEVEL has served as President since February, 1997 and Director and
Secretary since April, 1997. He received his undergraduate degrees in
mathematics and economics at Rice University. He received graduate degrees in
electrical engineering and computer science at Johns Hopkins University. Dr.
Hoevel's career spans nearly twenty years of technology development and
executive management. During his tenure at AT&T/NCR, he held numerous positions
of increased responsibility including director of Advanced Architecture, chief
architect for Workstation Products Division, vice president for Research and
Development Division, and chief technical officer for AT&T Global Information
Solutions. Dr. Hoevel holds seven U.S. Patents in technology design and is the
author of 39 technical papers.
MASAHIRO TSUCHIYA has served as a Director since August, 1992. He received
his Ph.D. degree in computer sciences from the University of Texas at Austin.
Currently he is president of Sypex International Company, based in the U.S. and
Japan. As founder and president of Sypex, he has served as consultant to
several startup and major corporations in the U.S., Japan and Korea on high
technology product development and marketing plans. From 1980 to 1988, he
worked on systems engineering of several major U.S. missile and space defense
programs at TRW Defense Systems Group, Redondo Beach, California. His academic
career includes a research associate at the University of California, Berkeley
in 1991, and an adjunct professor of computer science at the University of
Southern California, Los Angeles, in 1986. From 1973 to 1979, he was an
associate professor at the University of Hawaii at Manoa, Honolulu, an assistant
professor at the University of California, Irvine, and at Northwestern
University, Evanston, Illinois. In 1975, he was a visiting computer scientist
for research in computer architecture at Arhus University, Arhus, Denmark, and
in 1972, he was a visiting lecturer at Konan University, Japan.
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<PAGE>
COMPENSATION OF
EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
of certain of the Company's executive officers, including the Company's Chief
Executive Officer and all executive officers (the "Named Executive") whose total
annual salary and bonus exceeded $100,000, for the years ended December 31,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
---------------------------------------------- -----------------------------------------
Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------------------
Name and Restricted Securities
principal Other annual stock underlying LTIP All other
position Year Salary Bonus compensation award(s) Options/SARs payouts compensation
($) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George W. 1996 $160,000 0 0 0 0 0 0
Smith, CEO 1995 $130,000 0 0 0 0 0 0
1994 $130,000 0 0 0 0 0 0
</TABLE>
- -----------------------------------------
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth information with respect to the exercised
and unexercised options to purchase shares of Common Stock for each of the Named
Executives held by them at December 31, 1996:
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In the Money
Acquired Value Options at Options at
on Exercise Realized(1) December 31, 1996 December 31, 1996(2)
----------- ----------- ------------------------ ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George A. Smith 298,077 $593,173 1,160,000 0 $995,200 0
</TABLE>
_________________
(1) Represents an amount equal to the number of options multiplied by the
difference between the average of the closing bid and asked prices for the
Common Stock in the Over-the-Counter Market on the date of exercise, June
24, 1996 ($2.00 per share) and any lesser exercise price.
(2) Represents an amount equal to the number of options multiplied by the
difference between the average of the closing bid and asked prices for the
Common Stock in the Over-the Counter Market on December 31, 1996 ($1.22 per
share) and any lesser exercise price.
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<PAGE>
EMPLOYMENT AGREEMENTS
As of February 3, 1997, the Company entered into a three (3) year
employment agreement with Dr. Lee W. Hoevel, the Company's President, pursuant
to which the Company agreed to pay Dr. Hoevel an annual base salary of $130,000,
plus other benefits. The Company granted options to Dr. Hoevel to purchase up
to 600,000 shares of Common Stock, 300,000 options of which are the subject of a
registration statement, at an exercise price of $1.29 per share. The options
vest at the rate of 200,000 options per year on each of the three (3)
anniversaries following the date of the employment agreement. Further, the
Company has agreed to issue up to an additional 50,000 shares of Common Stock
and to grant options to purchase up to 50,000 shares of Common Stock based on
the achievement of certain events related to the development of the Company's
Meta 6000 microprocessor chip. The exercise price of the 50,000 options will be
based on the market price of the Company's Common Stock on the grant date of the
options. The vesting of these options may be accelerated in the event of a
change of control of the Company.
In the event that the Company terminates Dr. Hoevel without cause or Dr.
Hoevel resigns under circumstances designated as a "forced resignation," Dr.
Hoevel will be entitled to receive his salary for a period of six (6) months
from the effective date of his termination of employment, and further, under
such circumstances or in the event of his death or disability, will be entitled
to receive options to purchase up to 16,667 shares of Common Stock for each full
month of his prior employment and an additional 100,000 options representing the
accelerated vesting of options for the six (6) month period following the
termination of the employment agreement.
STOCK OPTION PLANS
The Company has adopted three (3) stock option plans (collectively, the
"Stock Option Plans") for officers, directors, key employees and certain
consultants of the Company and its subsidiaries.
1996 STOCK OPTION PLAN. In 1996, the Company and its stockholders adopted
the Company's 1996 Stock Option Plan (the "1996 Plan").
The Company has reserved for issuance thereunder an aggregate of 4,500,000
shares of Common Stock. The Company has granted options to purchase up to
688,000 shares of Common Stock under the 1996 Plan. Of the 688,000 options
granted, no options have vested, and the remaining 688,000 options may vest
subject to certain schedules. The Board of Directors has approved a provision
in the 1996 Plan which will place a 500,000 share limit on the number of options
that may be granted under the 1996 Plan to an employee in each fiscal year.
A description of the 1996 Plan is set forth below. The description is
intended to be a summary of the material provisions of the 1996 Plan and does
not purport to be complete.
ADMINISTRATION OF AND ELIGIBILITY UNDER 1996 PLAN. The 1996 Plan, as
adopted, provides for the issuance of options to purchase shares of Common Stock
to officers, directors, employees, independent contractors and consultants of
the Company and its subsidiaries as an incentive to remain in the employ of or
to provide services to the Company and its subsidiaries. The 1996 Plan
authorizes the issuance of incentive stock options ("ISOs"), non-qualified stock
options ("NSOs") and stock appreciation rights ("SARs") to be granted by a
committee (the "Committee") to be established by the Board of Directors to
administer the 1996 Plan.
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<PAGE>
Subject to the terms and conditions of the 1996 Plan, the Committee will
have the sole authority to determine: (a) the persons ("optionees") to whom
options to purchase shares of Common Stock and SARs will be granted, (b) the
number of options and SARs to be granted to each such optionee, (c) the price to
be paid for each share of Common Stock upon the exercise of each option, (d) the
period within which each option and SAR will be exercised and any extensions
thereof, and (e) the terms and conditions of each such stock option agreement
and SAR agreement which may be entered into between the Company and any such
optionee.
All officers, directors and employees of the Company and its subsidiaries
and certain consultants and other persons providing significant services to the
Company and its subsidiaries will be eligible to receive grants of options and
SARs under the 1996 Plan. However, only employees of the Company and its
subsidiaries are eligible to be granted ISOs.
STOCK OPTION AGREEMENTS. All options granted under the 1996 Plan will
be evidenced by an option agreement or SAR agreement between the Company and the
optionee receiving such option or SAR. Provisions of such agreements entered
into under the 1996 Plan need not be identical and may include any term or
condition which is not inconsistent with the 1996 Plan and which the Committee
deems appropriate for inclusion.
INCENTIVE STOCK OPTIONS. Except for ISOs granted to stockholders
possessing more than ten percent (10%) of the total combined voting power of all
classes of the securities of the Company or its subsidiaries to whom such
ownership is attributed on the date of grant ("Ten Percent Stockholders"), the
exercise price of each ISO must be at least 100% of the fair market value of the
Company's Common Stock as determined on the date of grant. ISOs granted to Ten
Percent Stockholders must be at an exercise price of not less than 110% of such
fair market value.
Each ISO must be exercised, if at all, within ten (10) years from the date
of grant, but, within five (5) years of the date of grant in the case of ISO's
granted to Ten Percent Stockholders.
An optionee of an ISO may not exercise an ISO granted under the 1996 Plan
so long as such person holds a previously granted and unexercised ISO.
The aggregate fair market value (determined as of time of the grant of the
ISO) of the Common Stock with respect to which the ISOs are exercisable for the
first time by the optionee during any calendar year shall not exceed $100,000.
As of the date of this Prospectus, ISOs have been granted under the 1996
Plan to purchase up to 77,519 shares of Common Stock, at an exercise price of
$1.29 per share, subject to certain vesting schedules.
NON-QUALIFIED STOCK OPTIONS. The exercise price of each NSO will be
determined by the Committee on the date of grant. However, the exercise price
for the NSOs under the 1996 Plan will in no event be less than 100% of the fair
market value of the Common Stock on the date the option is granted, or not less
than 110% of the fair market value of the Common Stock on the date such option
is granted in the case of an option granted to a Ten Percent Stockholder.
The exercise period for each NSO will be determined by the Committee at the
time such option is granted, but in no event will such exercise period exceed
ten (10) years from the date of grant.
As of the date of this Report, NSOs have been granted under the 1996 Plan
to purchase up to 610,481 shares of Common Stock, subject to certain vesting
schedules. These options have per share exercise prices which range from $0.72
to $1.47.
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<PAGE>
STOCK APPRECIATION RIGHTS. Each SAR granted under the 1996 Plan will
entitle the holder thereof, upon the exercise of the SAR, to receive from the
Company, in exchange therefor, an amount equal in value to the excess of the
fair market value of the Common Stock on the date of exercise of one share of
Common Stock over its fair market value on the date of grant (or in the case of
an SAR granted in connection with an option, the excess of the fair market of
one share of Common Stock at the time of exercise over the option exercise price
per share under the option to which the SAR relates), multiplied by the number
of shares of Common Stock covered by the SAR or the option, or portion thereof,
that is surrendered.
SARs will be exercisable only at the time or times established by the
Committee. If an SAR is granted in connection with an option, the SAR will be
exercisable only to the extent and on the same conditions that the related
option could be exercised. The Committee may withdraw any SAR granted under the
1996 Plan at any time and may impose any conditions upon the exercise of an SAR
or adopt rules and regulations from time to time affecting the rights of holders
of SARs.
As of the date of this Report, no SARs have been granted under the 1996
Plan.
TERMINATION OF OPTION AND TRANSFERABILITY. In general, any unexpired
options and SARs granted under the 1996 Plan will terminate: (a) in the event of
death or disability, pursuant to the terms of the option agreement or SAR
agreement, but not less than six (6) months or more than twelve (12) months
after the applicable date of such event, (b) in the event of retirement,
pursuant to the terms of the option agreement or SAR agreement, but no less that
thirty (30) days or more than three (3) months after such retirement date, or
(c) in the event of termination of such person other than for death, disability
or retirement, until thirty (30) days after the date of such termination.
However, the Committee may in its sole discretion accelerate the exercisability
of any or all options or SARs upon termination of employment or cessation of
services.
The options and SARs granted under the 1996 Plan generally will be
non-transferable, except by will or the laws of descent and distribution.
ADJUSTMENTS RESULTING FROM CHANGES IN CAPITALIZATION. The number of
shares of Common Stock reserved under the 1996 Plan and the number and price of
shares of Common Stock covered by each outstanding option or SAR under the 1996
Plan will be proportionately adjusted by the Committee for any increase or
decrease in the number of issued and outstanding shares of Common Stock
resulting from any stock dividends, split-ups, consolidations,
recapitalizations, reorganizations or like event.
AMENDMENT OR DISCONTINUANCE OF 1996 PLAN. The Board of Directors has
the right to amend, suspend or terminate the 1996 Plan at any time. Unless
sooner terminated by the Board of Directors, the 1996 Plan will terminate on
July 10, 2006, the tenth (10th) anniversary date of the effectiveness of 1996
Plan.
1993 STOCK OPTION PLANS. In 1993, the Company adopted two stock option
plans, an Incentive Stock Option Plan ("ISOP") and a Nonqualified Stock Option
Plan ("NSOP") (collectively, the "1993 Plans"). The 1993 Plans are for
officers, directors, key employees and certain consultants of the Company and
its subsidiaries.
INCENTIVE STOCK OPTION PLAN Under the ISOP, the Board of Directors is
authorized to grant options to purchase up to 500,000 shares of Common Stock to
officers, directors and key employees of the Company. The Board of Directors
administers the ISOP and designates the optionees and the number of shares
subject to the options.
44
<PAGE>
Except for options granted to certain Ten Percent (10%) Stockholders, as
hereinafter defined, the exercise price of the option must be at least one
hundred percent (100%) of the fair market value of the Company's Common Stock as
determined on the date of grant. Options granted to stockholders possessing
more than ten percent (10%) of the combined voting power of all classes of the
Company's Common Stock or to persons to whom such ownership is attributed on the
effective date of the grant ("Ten Percent (10%) Stockholders") must be at an
exercise price of not less than 110% of such fair market value. Each option
granted under the ISOP must be exercised, if at all, within nine (9) years and
eleven (11) months from the date of grant with respect to optionees, but within
four (4) years and eleven (11) months from the date of grant with respect to 10%
Stockholders, and becomes exercisable commencing one year after the date of
grant of the option. An optionee may not exercise an option granted under the
ISOP so long as such optionee holds a previously granted and unexercised
incentive stock option. In the event of termination of employment, the
optionee's option must be exercised within thirty (30) days of termination,
unless extended by the Board of Directors, (one year in the event termination is
caused by death or permanent and total disability) to the extent the option is
otherwise exercisable. The Board of Directors shall have the ability to set the
terms for granting future options with the only proviso being that the price of
the option on the date it is granted be equal to the then fair market value of
the Company's Common Stock as determined by the Board of Directors. As of the
date of this Prospectus, the Company has granted options to purchase up to
40,000 shares of Common Stock an at exercise price of $1.00 per share, 8,000 of
which are currently exercisable.
NONQUALIFIED STOCK OPTION PLAN. The NSOP provides for the creation of
non-qualified stock options for the purchase of up to 4,000,000 shares of the
Company's Common Stock for officers, directors, key employees and certain
consultants of the Company. An officer or director who receives a nonqualified
stock option will not recognize taxable income. However, upon exercise of a
nonqualified stock option, an officer or director will recognize ordinary
taxable income and the Company will be entitled to a corresponding deduction in
an amount equal to the difference between the option exercise price and the fair
market value of the Common Stock on the date of exercise of the nonqualified
stock option. The Company hereby undertakes not to grant any option under the
NSOP at an exercise price less than 85% of the fair market value of the Common
Stock on the date of grant of any option under the NSOP. As of the date of
this Prospectus, the Company had granted options to purchase up to 3,421,883
shares of Common Stock, 886,500 of which have been exercised. Of the options to
purchase up to 2,535,323 shares, which remain issued and outstanding, at
exercise prices ranging from $0.125 to $1.47 per share, 1,058,333 are currently
exercisable, subject to certain vesting schedules.
COMPENSATION OF DIRECTORS
The Company does not compensate directors for services rendered as
directors. Outside directors are issued stock options which vest over a period
of three years. The Company reimburses directors for travel expenses incurred
by directors for the benefit of the Company. The Company has obtained
directors' and officers' liabilities insurance with a $1,000,000 limit of
liability. The policy period expires on January 12, 1998. The Company intends
to renew such policy or obtain comparable coverage after the expiration of such
policy. However, there can be no assurances to this effect. See "Description
of Securities - Options."
LIMITATION ON DIRECTORS' LIABILITIES; INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation and Bylaws designate the
relative duties and responsibilities of the Company's officers, establish
procedures for actions by directors and stockholders and other items. The
Company's Certificate of Incorporation and Bylaws also contain extensive
indemnification provisions which will permit the Company to indemnify its
officers and directors to the maximum extent provided by Delaware law. Pursuant
to the Company's Certificate of Incorporation and under Delaware law, directors
of the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments
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<PAGE>
or stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.
In addition, the Company has adopted a form of indemnification agreement
(the "Indemnification Agreement") which provides the indemnitee with the maximum
indemnification allowed under applicable law. The Company has entered into
Indemnification Agreements with each of its directors. Since the Delaware
statute is non-exclusive, it is possible that certain claims beyond the scope of
the statute may be indemnifiable. The Indemnification Agreements provide a
scheme of indemnification which may be broader than that specifically provided
by Delaware law. It has not yet been determined, however, to what extent the
indemnification expressly permitted by Delaware law may be expanded, and
therefore the scope of indemnification provided by the Indemnification
Agreements may be subject to future judicial interpretation.
The Indemnification Agreement provides, in pertinent part, that the Company
shall indemnify an indemnitee who is or was a party or becomes a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding whether civil, criminal, administrative or investigative by reason of
the fact that the indemnitee is or was a director, officer, key employee or
agent of the Company or any subsidiary of the Company. The Company shall
advance all expenses, judgments, fines, penalties and amounts paid in settlement
(including taxes imposed on indemnitee on account of receipt of such payouts)
incurred by the indemnitee in connection with the investigation, defense,
settlement or appeal of any civil or criminal action or proceeding as described
above. The indemnitee shall repay such amounts advanced only if it shall be
ultimately determined that he or she is not entitled to be indemnified by the
Company. The advances paid to the indemnitee by the Company shall be delivered
within 20 days following a written request by the indemnitee. Any award of
indemnification to an indemnitee, if not covered by insurance, would come
directly from the assets of the Company, thereby affecting a stockholder's
investment.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
Except as set forth in employment agreements of certain employees of the
Company, the Company has no compensatory plans or arrangements which relate to
the resignation, retirement or any other termination of an executive officer or
key employee with the Company or a change in control of the Company or a change
in such executive officer's or key employee's responsibilities following a
change in control.
KEY PERSON INSURANCE POLICIES
The Company has obtained a term life insurance policy in the amount of
$1,500,000 with respect to George Smith, the Company's Chief Executive Officer,
of which the Company is the beneficiary of $1,000,000 and Mr. Smith's wife is
the beneficiary of $500,000. The Company and Mr. Smith pay the premium for such
policy pro rata to their respective beneficial interests in the policy.
COMPENSATION AND AUDIT COMMITTEES; COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION
The Board has a Compensation Committee comprised of the following members
of the Board of Directors: Sigmund Hartmann, Frank LaChapelle and Masahiro
Tsuchiya, the latter two (2) of whom may be deemed to be outside/non-employee
directors. The Board has an Audit Committee comprised of the following members
of the Board of Directors: _____________________, _______________ of whom may be
deemed to be outside/non-employee directors. The Board has no standing
committee on nominations or any other committees performing equivalent
functions.
The Compensation Committee reviews and approves the annual salary and bonus
for each executive officer (consistent with the terms of any applicable
employment agreement), reviews, approves and recommends terms and conditions for
all employee benefit plans (and changes thereto) and administers the Stock
Option Plans and such other employee benefit plans as may be adopted by the
Company from time to time.
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The Audit Committee reports to the Board regarding the appointment of the
independent public accountants of the Company, the scope and fees of the
prospective annual audit and the results thereof, compliance with the Company's
accounting and financial policies and management's procedures and policies
relative to the adequacy of the Company's system of internal accounting
controls.
Certain of the Company's principal stockholders have entered into voting
agreements with respect to 10,000,000 shares of Common Stock and other shares of
Common Stock which may be converted from up to $1,500,000 of certain convertible
promissory notes. See "Certain Relationships and Related Transactions."
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and the holders of more than 10% of the Company's Common
Stock to file with the Commission initial reports of ownership and reports of
changes in ownership of equity securities of the Company. Based solely upon a
review of such forms, or on written representations form certain reporting
persons that no other reports were required for such persons, the Company
believes that all reports required pursuant to Section 16(a) with respect to its
executive officers, directors and 10% stockholders for the 1996 fiscal year were
timely filed, except as set forth below.
Sigmund Hartmann, a director of the Company, inadvertently failed to file
on a timely basis a Form 4 with the Commission disclosing his change in
beneficial ownership when he acquired 53,334 shares of the Company's Common
Stock pursuant to the exercise of a stock option. The Form 3 disclosing his
initial beneficial ownership of the option was filed on a timely basis. Mr.
Hartmann subsequently filed a Form 4 disclosing the transaction.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING AGREEMENT WITH UNIVERSAL MICROTECHNOLOGY, INC.
On September 1, 1995, the Company entered into a consulting agreement with
Universal Microtechnology, Inc. ("Universal"), all of the shares of which are
beneficially owned by its President, Sigmund Hartmann, who is also a director of
the Company, for the provision to the Company of services related to the
development of speech and voice technology. The consulting agreement was
amended on November 27, 1996 pursuant to which Universal agreed to provide
additional technical and administrative services to the Company and the Company
agreed to pay Universal the sum of $8,000 per month in fees during the period
from January 1, 1997 through May 1, 1998.
KEY PERSON INSURANCE POLICIES
The Company has obtained a term life insurance policy in the amount of
$1,500,000 with respect to George Smith, the Company's Chief Executive Officer,
of which the Company is the beneficiary of $1,000,000 and Mr. Smith's wife is
the beneficiary of $500,000. The Company and Mr. Smith pay the premium for such
policy pro rata to their respective beneficial interests in the policy.
STOCK PURCHASE AGREEMENT WITH PARAGON LIMITED PARTNERSHIP AND RELATED
SHAREHOLDERS AGREEMENT
On January 26, 1996, the Company entered into a Stock Purchase Agreement
with Paragon Limited Partnership, an exempted limited partnership organized
under the laws of the Cayman Islands, British West Indies ("Paragon"),
pursuant to which Paragon purchased 2,000,000 shares of Common Stock at a
purchase price of $1.00 per share. Of the 2,000,000 shares, 50,000 shares
were purchased on December 29, 1995.
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Further, on such date, the Company entered into a placement agreement (the
"Placement Agreement") with Paragon Capital Management LLC, an exempted limited
liability company organized under the laws of the Cayman Islands, British West
Indies ("Paragon Capital"), pursuant to which Paragon Capital agreed to act as
placement agent with respect to the sale of up to an additional 8,000,000 shares
of Common Stock at a purchase price of $1.00 per share. Paragon Capital is the
sole general partner of Paragon. On or about March 26, 1996, the Company issued
an additional 8,000,000 shares of Common Stock at a purchase price of $1.00 per
share to certain persons (the "Purchasers") pursuant to the Placement Agreement,
including, Den Norsk Krigsforsikring for Skib (2,000,000 shares),
Investeringsselskapet Amandus AS (2,000,000 shares), A/S/ Selvaag Invest
(1,500,000 shares), Andreas Ugland (1,500,000 shares), Woodbridge Asset
Management Limited (266,667 shares), Pollex A/S (200,000 shares), J. Arthur
Olafsen (250,000 shares), Filab A/S (100,000 shares), Martin S. Albert (133,333
shares) and Bent Aasnas (50,000 shares). Paragon Capital received a placement
fee from the Purchasers, and not from the proceeds of such offering, of $0.055
per share, pursuant to separate agreements between Paragon Capital and each of
the Purchasers.
On March 19, 1996, Martin S. Albert, a director of Paragon Capital, became
a director of the Company in connection with the closing of the purchase of the
initial 2,000,000 shares pursuant to the Stock Purchase Agreement. Mr. Albert
became the Chairman of the Board of Directors of the Company on August 1, 1997.
Further, the Company has agreed to use its best efforts to elect Mr. Albert or
another designee of Paragon, as a director of the Company so long as Paragon
continues to own at least 1,000,000 shares of the Company's Common Stock.
Each of the Purchasers and Paragon have entered into a Shareholders
Agreement pursuant to which, in pertinent part, the Purchasers and Paragon have
agreed to vote the 10,000,000 shares owned or controlled by them: (i) in favor
of the election of Martin S. Albert, or another designee of Paragon, as a
director of the Company, (ii) in favor of each of the actions contemplated by
the Shareholders Agreement and any action required in furtherance thereof, and
(iii) except as specifically instructed by Paragon in advance, against (A) any
action or agreement which would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the Company
under the Shareholders Agreement, (B) any extraordinary corporate transaction,
such as a merger, consolidation or other business combination involving the
Company or any subsidiary of the Company, (C) any sale, lease or transfer of a
material amount of assets of the Company or any subsidiary of the Company, (D)
any change in the majority of the board of directors of the Company, (E) any
material change in the present capitalization of the Company (other than as
contemplated by the Shareholders Agreement), (F) any amendment of the Company's
Certificate of Incorporation or Bylaws, (G) any other material change in the
Company's corporate structure or business, or (H) any other action which is
intended, or could reasonably be expected to impede, interfere with, delay,
postpone, discourage or materially adversely affect, the transaction
contemplated by the Shareholders Agreement. See "Certain Relationships and
Related Transactions - Amerscan Partners III Convertible Promissory Notes."
Further, each of the parties to the Shareholders Agreement has granted to,
and appointed, Paragon and Erik C.T. Tiller, Rolv E. Norderhaug and Martin S.
Albert, in their respective capacities as directors of Paragon Capital, and any
individual who shall thereafter succeed any of them as a director of Paragon
Capital, and any other designee of Paragon, individually, such person's
irrevocable proxy and attorney-in-fact (so long as such person is a party to the
Shareholders Agreement), with full power of substitution, to vote the shares of
Common Stock owned by each such person in accordance with the immediately
preceding paragraph. Mr. Tiller is also an affiliate of Woodbridge Asset
Management Limited.
The Shareholders Agreement will terminate on the earlier of: (i) April 30,
1998, (ii) the date on which the Company's Board of Directors and the
stockholders of the Company vote as required by law and by the Company's
Certificate of Incorporation and By-laws for the merger or consolidation of the
Company with another company, or for the sale of all or substantially all of the
Company's assets, or for its liquidation, (iii) the date on which the holders of
not less than 66-2/3% of the shares of Common Stock subject to the Shareholders
Agreement agree in writing to the termination of the Shareholders Agreement, and
(iv) the date on which the combined holdings of the parties to the Shareholders
Agreement are reduced to ownership of less than 5% of the issued and outstanding
shares of Common Stock.
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The Company has granted Paragon and the Purchasers the right, upon the
written request of at least 25% of the holders of the 10,000,000 shares, to
require the Company to effect two registrations of such shares, and an unlimited
number of "piggy back" registrations with respect to such shares, subject to
certain conditions.
The Company also has granted Paragon a right of first refusal to purchase
or cause to be purchased from the Company any of its securities which may be
offered in any private placement exempt from registration under the Securities
Act, on the same terms and conditions that may be offered to any third party.
In connection with such right of first refusal, the Company is required to give
Paragon 60 days' prior written notice of the Company's intention to conduct such
a private placement, including the material terms and conditions thereof.
Paragon will have 10 days (deemed to begin no earlier than 10 days prior to the
end of such 60 day period) to provide the Company with written notice of
Paragon's election to exercise such right of first refusal.
AMERSCAN PARTNERS III CONVERTIBLE PROMISSORY NOTES
As of July 15, 1997, the Company executed a convertible promissory note
(the "First Amerscan Note"), in the principal amount of $1,500,000, in favor of
Amerscan Partners III, Limited Partnership, an exempted limited partnership
organized under the laws of Bermuda ("Amerscan Partners III"), with respect to a
loan to the Company in the amount of $1,500,000.
The First Amerscan Note bears interest at the rate of eight percent PER
ANNUM, with the principal amount of the First Amerscan Note, together with
accrued and unpaid interest thereon, payable on July 15, 1998.
Amerscan Partners III has the option at any time to convert the outstanding
principal amount of the First Amerscan Note, together with accrued and unpaid
interest thereon, into shares of the Company's Common Stock at a per share
conversion rate equal to the aggregate principal amount of the First Amerscan
Note, together with accrued and unpaid interest thereon, divided by the lower
of: (i) $1.00, subject to adjustments for stock splits, reverse splits, stock
dividends or recapitalizations of the Common Stock, and (ii) 75% of the average
of the mean between the closing bid and asked prices for the Common Stock during
the five (5) trading days preceding the notice date of the exercise of such
option. Further, the Company has the right to require Amerscan Partners III, at
any time prior to July 15, 1998, to convert the outstanding principal amount of
the First Amerscan Note, together with accrued and unpaid interest thereon, if
on the date of such request, the mean between the closing bid and asked prices
of the Common Stock is greater than $2.00 per share, subject to adjustments for
stock splits, reverse splits, stock dividends or recapitalizations.
As of September 16, 1997, the Company executed a convertible promissory
note (the "Second Amerscan Note"), in the principal amount of $500,000, in favor
of Amerscan Partners III, with respect to a loan to the Company in the amount of
$500,000.
The Second Amerscan Note bears interest at the rate of eight percent PER
ANNUM, with the principal amount of the Second Amerscan Note, together with
accrued and unpaid interest thereon, payable on September 16, 1998.
Amerscan Partners III has the option at any time to convert the outstanding
principal amount of the Second Amerscan Note, together with accrued and unpaid
interest thereon, into shares of the Company's Common Stock at a per share
conversion rate equal to the aggregate principal amount of the Second Amerscan
Note, together with accrued and unpaid interest thereon, divided by the lower
of: (i) $0.50, subject to adjustments for stock splits, reverse splits, stock
dividends or recapitalizations of the Common Stock, and (ii) 75% of the average
of the mean between the closing bid and asked prices for the Common Stock during
the five (5) trading days preceding the notice date of the exercise of such
option. Further, the Company has the right to require Amerscan Partners III, at
any time prior to September 16, 1998, to convert the outstanding principal
amount of the Second Amerscan Note, together with accrued and unpaid interest
thereon, if on the
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date of such request, the mean between the closing bid and asked prices of the
Common Stock is greater than $2.00 per share, subject to adjustments for stock
splits, reverse splits, stock dividends or recapitalizations.
So long as any amount of either of the First Amerscan Note or the Second
Amerscan Note (collectively, the "Amerscan Notes") remains unpaid, Amerscan
Partners III or its designee shall be entitled to appoint one member to the
Board of Directors of the Company, who shall further be entitled to appoint the
chairman of a Finance Committee of the Board of Directors which shall consist of
at least three (3) members of the Board of Directors. As of the date of this
Prospectus, Amerscan has not exercised its right to appoint such a director.
Each of the Amerscan Notes is secured by the Company's intellectual property
rights relating to the Meta 6000, pursuant to the terms of a Security Agreement,
dated July 15, 1997, subject to the terms and conditions of any prior agreements
of the Company with respect to the Meta 6000.
Upon conversion of any portion of either of the Amerscan Notes into shares
of Common Stock, Amerscan Partners III has agreed to sign an endorsement to the
Shareholders Agreement agreeing to be bound by the terms of the Shareholders
Agreement with respect to such shares so converted, as though Amerscan Partners
III were an original party thereto. Amerscan Partners III will have the sole
power to vote and dispose of such shares of Common Stock, subject to the terms
of the Shareholders Agreement.
Amerscan Capital Management, Ltd., a Bermuda exempted limited duration
company ("Amerscan Capital") is the sole general partner of Amerscan Partners
III. Mr. Albert serves as a director and Deputy Chairman, Rolv Norderhaug
serves as Vice President and a director, and Erik C.T. Tiller serves as a
director of Amerscan Capital.
The Company has agreed to pay to Amerscan Capital a placement fee equal to
eight percent (8%) of the gross proceeds of funds received by the Company
pursuant to each of the Amerscan Notes. The Company continues to owe Amerscan
Capital the amount of $160,000 as a placement fee.
The Company believes that all such transactions with affiliates of the
Company have been entered into on terms no less favorable to the Company than
could have been obtained from independent third parties. The Company intends
that any transactions and loans with officers, directors and five percent (5%)
or greater stockholders, following the date of this Prospectus, will be on terms
no less favorable to the Company than could be obtained from independent third
parties and will be approved by a majority of the independent, disinterested
directors of the Company.
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PRINCIPAL STOCKHOLDERS
The following table reflects, as of the date of this Prospectus,
information concerning the beneficial Common Stock ownership of: (a) each
director of the Company, (b) each executive officer named in the Summary
Compensation Table, (c) each person known by the Company to be a beneficial
holder of five percent (5%) or more of its Common Stock, and (d) all executive
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS NO. OF PERCENT #
OF BENEFICIAL OWNER SHARES BEFORE OFFERING AFTER OFFERING
- ------------------- ------ --------------- --------------
<S> <C> <C> <C>
George W. Smith(1) 2,287,077 _____
Lee W. Hoevel(2) 30,000 *
Masahiro Tsuchiya(3) 3,740,583 _____
Frank LaChapelle(4) 100,000 *
Sigmund Hartmann(5) 76,667 *
Philip Neches(6) 0 *
Martin S. Albert(7) 10,000,000 _____
Paragon Limited Partnership(7) 10,000,000 _____
Den Norsk Krigsforsikring for Skib(7) 2,000,000 _____
Investeringsselskapet Amandus AS(7) 2,000,000 _____
All directors and
officers as a group(7 persons)(8) 16,234,327 _____
</TABLE>
________________________________
# Pursuant to the rules of the Commission, shares of Common Stock which
an individual or group has a right to acquire within 60 days pursuant to the
exercise of options or warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.
* Less than 1%.
1. Mr. Smith's address is c/o International Meta Systems, Inc., 100 North
Sepulveda Boulevard, Suite 601, El Segundo, California 90245. Mr. Smith's
holdings consist of 1,127,077 shares of Common Stock currently owned and vested
options for 1,160,000 shares.
2. Dr. Hoevel's address is c/o International Meta Systems, Inc., Austin
Design Center, 7718 Wood Hollow Drive, Suite 150, Austin, TX 78731. Dr.
Hoevel's holdings consist of 30,000 shares of Common Stock and unvested options
for 600,000 shares of Common Stock.
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3. Dr. Tsuchiya's address is 1585 Kaminaka Drive, Honolulu, Hawaii 96846.
Included in the shares owned by Dr. Tsuchiya are 886,583 shares owned by Sypex
International, of which Dr. Tsuchiya is part owner.
4. Mr. LaChapelle's address is c/o Interscience Computer Corporation,
5171 Clareton Drive, Agoura Hills, California 91301. In addition, Mr.
LaChapelle holds unvested options for 100,000 shares.
5. Mr. Hartmann's address is c/o International Meta Systems, Inc., 100
North Sepulveda Boulevard, Suite 601, El Segundo, California 90245. In
addition, Mr. Hartmann holds unvested options for 23,333 shares.
6. Dr. Neches' address is 12 Murray Hill Manor, Murray Hill, NJ 07974.
In addition, Dr. Neches holds unvested options for 100,000 shares.
7. Mr. Albert's address is c/o Dolphin Interconnect Solutions, Inc.,
3609 E. Thousand Oaks Boulevard, Suite 209, Westlake Village, California 91362.
Mr. Albert is the registered owner of 133,000 shares, and he is a director of
Paragon Capital Management LLC ("Paragon Capital"), which is the sole general
partner of Paragon Limited Partnership ("Paragon"), the registered owner of
2,000,000 shares. Certain parties, who in the aggregate own or control
10,000,000 shares of Common Stock, have entered into a Shareholders Agreement,
dated March 26, 1996 (the "Shareholders Agreement"), pursuant to which such
parties have granted certain voting rights to Paragon and certain directors of
Paragon Capital with respect to the 10,000,000 shares. The parties to the
Shareholders Agreement include: Paragon (2,000,000 shares), Den Norsk
Krigsforsikring for Skib (2,000,000 shares), Investeringsselskapet Amandus AS
(2,000,000 shares), A/S/ Selvaag Invest (1,500,000 shares), Andreas Ugland
(1,500,000 shares), Woodbridge Asset Management Limited (266,667 shares), Pollex
A/S (200,000 shares), J. Arthur Olafsen (250,000 shares), Filab A/S (100,000
shares), Martin S. Albert (133,333 shares) and Bent Aasnas (50,000 shares). The
Shareholders Agreement remains in effect until April 30, 1998, unless earlier
terminated in accordance with its provisions. The number of shares reflected in
the chart as beneficially owned by Mr. Albert and Paragon does not include
shares of Common Stock which may be converted from: (a) the First Amerscan Note
issued in the name of Amerscan Partners III, in the principal amount of
$1,500,000, at a per share conversion price equal to the lower of: (i) $1.00,
subject to certain adjustments, and (ii) 75% of the average of the mean between
the closing bid and asked prices for the Common Stock during the five (5)
trading days preceding the date of notice of conversion, or (b) the Second
Amerscan Note issued in the name of Amerscan Partners III, in the principal
amount of $500,000, at a per share conversion price equal to the lower of: (i)
$0.50, subject to certain adjustments, and (ii) 75% of the average of the mean
between the closing bid and asked prices for the Common Stock during the five
(5) trading days preceding the date of notice of conversion. Mr. Albert is a
director and Deputy Chairman of Amerscan Capital, the general partner of
Amerscan Partners III. Amerscan Partners III has agreed to be bound by the
terms of the Shareholders Agreement with respect to any shares of Common Stock
which may be converted from either of the Amerscan Notes. See "Certain
Relationships and Related Transactions."
8. Includes 15,074,327 shares of Common Stock and vested options to
purchase up to 1,160,000 shares of Common Stock. Does not include unvested
options to purchase up to 823,333 shares of Common Stock or shares of Common
Stock which may be converted from the Amerscan Notes. See "Certain
Relationships and Related Transactions."
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DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 70,000,000 shares of
Common Stock, par value $0.0001 per share, and 1,000,000 shares of preferred
stock, par value $0.0001. As of the date of this Prospectus, there were issued
and outstanding 38,855,941 shares of Common Stock and 250 shares of preferred
stock. There were also issued and outstanding warrants and options to purchase
up to 6,258,748 shares of Common Stock.
COMMON STOCK
Holders of the Common Stock are entitled to cast one vote for each share
held of record, to receive such dividends as may be declared by the Board of
Directors out of legally available funds and to share ratably in any
distribution of the Company's assets after payment of all debts and other
liabilities, upon liquidation, dissolution or winding up. Holders of the Common
Stock do not have preemptive rights or other rights to subscribe for additional
shares, and the Common Stock is not subject to redemption. The outstanding
shares of Common Stock are validly issued, fully paid and nonassessable.
Under Delaware law, each holder of a share of Common Stock is entitled to
one vote per share for each matter submitted to the vote of the stockholders,
and cumulative voting is allowed for the election of directors, if provided for
in the Certificate of Incorporation. The Company's Certificate of Incorporation
does not provide for cumulative voting.
PREFERRED STOCK
The Board of Directors is expressly authorized from time to time to provide
for the issuance of shares of preferred stock in one or more series, with such
voting powers and with such designations, preferences and other rights and
qualifications, limitations or restrictions thereof as shall be stated and
expressed in the resolution providing for the issue thereof adopted by the Board
of Directors. The Board of Directors may issue such preferred stock without
stockholder approval, and the voting and conversion rights of such stock
potentially could adversely affect the voting power of the holders of Common
Stock.
SERIES B PREFERRED STOCK. The Company has issued and outstanding 250
shares of Series B Preferred Stock. Each share of Series B Preferred Stock has
a designated value of $100 per share and is convertible into shares of Common
Stock at a conversion price (the "Series B Conversion Price") of $1.25 per share
of Common Stock.
Each share of Series B Preferred Stock has a cumulative preferential
dividend of $8.00 per share PER ANNUM, payable in cash or in shares of Common
Stock, at the option of the Company.
In the case of a dividend paid in Common Stock, the Company has agreed to
issue to each holder of record of Series B Preferred Stock on the Company's
books on each June 30 and December 31, respectively (the "Record Date"),
commencing June 30, 1996, as a dividend, that number of shares of Common Stock,
based on the fraction, the numerator of which is the cumulative amount of
accrued and unpaid dividends as of the Record Date, and the denominator of which
is the average of the market price of the Common Stock, based on the average of
the mean between the closing bid and asked sales prices for the Common Stock, at
the close of trading for the five (5) business days ending with the Record Date.
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Each share of Series B Preferred Stock will be automatically converted into
shares of Common Stock on November 30, 1997. Any shares of Series B Preferred
Stock may, at the option of the Company, be sooner converted into shares of
Common Stock at the Series B Conversion Price at any time following the issuance
of the shares of Series B Preferred Stock, after the first date on which the
market price of the Common Stock has achieved, at the close of trading over a
period of twenty (20) consecutive trading days, an average price of at least
$3.00 per share, which has not occurred as of the date of this Prospectus.
The shares of Series B Preferred Stock have certain piggyback registration
rights with respect to the underlying shares of Common Stock at any time prior
to November 30, 1997. The shares of Series B Preferred Stock may be converted
into shares of Common Stock, at the option of the holder, at any time prior to
November 30, 1997, but only in connection with a registration statement for the
underlying shares.
Upon the liquidation of the Company, the holders of the Series B Preferred
Stock will be entitled to a liquidation preference of $100 per share, plus the
amount of all accrued and unpaid dividends, prior to the payment of any amount
to holders of any other currently existing equity security of the Company.
The shares of Series B Preferred Stock do not have any voting rights. The
Series B Preferred Stock will be subject to adjustments for reclassification,
reorganizations, recapitalizations and certain other events.
WARRANTS
The Company has issued and outstanding, non-callable warrants to purchase
up to 614,298 shares of Common Stock at an exercise price of $_________ per
share, which have certain demand and piggyback registration rights and expire on
July 31, 2002, and additional warrants to purchase up to 250,000 shares of
Common Stock at an exercise price of $0.50 per share, which expire on October 9,
1999.
OPTIONS
The Company has issued and outstanding options to purchase 5,922,273 shares
of Common Stock to various employees, officers, directors and consultants of the
Company at exercise prices ranging from $0.01 to $1.47 per share, 2,966,283 of
which are currently exercisable. Of these options, 3,494,323 options have been
granted pursuant to certain stock option plans of the Company and are the
subject of certain currently effective registration statements, and an
additional ________ options have certain registration rights.
CONVERTIBLE PROMISSORY NOTES
FIRST AMERSCAN NOTE. As of July 15, 1997, the Company executed the First
Amerscan Note, in the principal amount of $1,500,000, in favor of Amerscan
Partners III, with respect to a loan to the Company in the amount of
$1,500,000.
The First Amerscan Note bears interest at the rate of eight percent (8%)
PER ANNUM, with the principal amount of the First Amerscan Note, together with
accrued and unpaid interest thereon, payable on July 15, 1998.
Amerscan Partners III has the option at any time to convert the outstanding
principal amount of the First Amerscan Note, together with accrued and unpaid
interest thereon, into shares of the Company's Common Stock at a per share
conversion rate equal to the aggregate principal amount of the First Amerscan
Note, together with accrued and unpaid interest thereon, divided by the lower
of: (i) $1.00, subject to adjustments for stock splits, reverse splits, stock
dividends or recapitalizations of the Common Stock, and (ii) 75% of the average
of the mean between the closing bid and asked prices for the Common Stock during
the five (5) trading days preceding the notice date of the exercise of such
option. Further, the Company has the right to require Amerscan Partners III, at
any time prior to July 15, 1998, to convert the outstanding principal amount of
the First Amerscan Note, together with accrued and unpaid interest thereon, if
on the date of such
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<PAGE>
request, the mean between the closing bid and asked prices of the Common Stock
is greater than $2.00 per share, subject to adjustments for stock splits,
reverse splits, stock dividends or recapitalizations.
SECOND AMERSCAN NOTE. As of September 16, 1997, the Company executed the
Second Amerscan Note, in the principal amount of $500,000, in favor of Amerscan
Partners III, with respect to a loan to the Company in the amount of $500,000.
The Second Amerscan Note bears interest at the rate of eight percent (8%)
PER ANNUM, with the principal amount of the Second Amerscan Note, together with
accrued and unpaid interest thereon, payable on September 16, 1998.
Amerscan Partners III has the option at any time to convert the outstanding
principal amount of the Second Amerscan Note, together with accrued and unpaid
interest thereon, into shares of the Company's Common Stock at a per share
conversion rate equal to the aggregate principal amount of the Second Amerscan
Note, together with accrued and unpaid interest thereon, divided by the lower
of: (i) $0.50, subject to adjustments for stock splits, reverse splits, stock
dividends or recapitalizations of the Common Stock, and (ii) 75% of the average
of the mean between the closing bid and asked prices for the Common Stock during
the five (5) trading days preceding the notice date of the exercise of such
option. Further, the Company has the right to require Amerscan Partners III, at
any time prior to September 16, 1998, to convert the outstanding principal
amount of the Second Amerscan Note, together with accrued and unpaid interest
thereon, if on the date of such request, the mean between the closing bid and
asked prices of the Common Stock is greater than $2.00 per share, subject to
adjustments for stock splits, reverse splits, stock dividends or
recapitalizations.
UNDERWRITERS' WARRANTS
The Company has agreed to sell to the Representatives, for $______,
warrants (the "Underwriters' Warrants") to purchase from the Company up to
_________ shares of Common Stock at an exercise price equal to _______% of the
offering price at which the Shares are initially offered to the public. The
Underwriters' Warrants are exercisable for a period of four (4) years commencing
one year from the date of this Prospectus, and are not transferable except to
the Representatives or members of the underwriting syndicate.
The Company has agreed to grant certain "piggyback" registration rights
with respect to the securities underlying the Underwriters' Warrants. If the
Company files a registration statement with respect to the Company's securities
during the period commencing one year from the date of this Prospectus and
ending five (5) years thereafter, except on certain forms of registration
statement, the holders of the securities underlying the Underwriters' Warrants
will be entitled to include their Units in such registration statement. The
Underwriters' Warrants contain anti-dilution provisions providing for adjustment
of the number of warrants and exercise price under certain conditions.
TRANSFER AGENT
The transfer agent for the Common Stock is Interwest Transfer Company,
Inc., 1981 East 4800 South, Suite 110, Salt Lake City, Utah 84117, (801)
272-9294.
CERTAIN BUSINESS COMBINATIONS AND OTHER PROVISIONS OF CERTIFICATE OF
INCORPORATION
The Company's Certificate of Incorporation includes certain provisions
which are intended to protect the Company's stockholders by rendering it more
difficult for a person or persons to obtain control of the Company without
cooperation of the Company's management. These provisions include the potential
implementation of a classified Board of Directors and certain supermajority
requirements for the amendment of the Company's Certificate of Incorporation and
Bylaws. Such provisions are often referred to as "anti-takeover" provisions.
55
<PAGE>
The inclusion of such "anti-takeover" provisions in the Certificate of
Incorporation may delay, deter or prevent a takeover of the Company which the
stockholders may consider to be in their best interests, thereby possibly
depriving holders of the Company's securities of certain opportunities to sell
or otherwise dispose of their securities at above-market prices, or limit the
ability of stockholders to remove incumbent directors as readily as the
stockholders may consider to be in their best interests.
BUSINESS COMBINATIONS WITH SUBSTANTIAL STOCKHOLDERS. Delaware law contains
a statutory provision which is intended to curb abusive takeovers of Delaware
corporations. Section 203 of the Delaware General Corporation Law addresses the
problem by preventing certain business combinations of the corporation with
interested stockholders within three years after such stockholders become
interested. Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or associate of such person, who is an "interested
stockholder" for a period of three (3) years from the date that such person
became an interested stockholder unless: (i) the transaction resulting in a
person becoming an interested stockholder, or the business combination, is
approved by the Board of Directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquired 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66-2/3%
of the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (i) the owner of
fifteen percent (15%) or more of the outstanding voting stock of the corporation
or (ii) an affiliate or associate of the corporation and who was the owner of
fifteen percent (15%) or more of the outstanding voting stock of the corporation
at any time within the three (3) year period immediately prior to the date on
which it is sought to be determined whether such person is an interested
stockholder.
SUPERMAJORITY REQUIRED FOR AMENDMENT OF CERTIFICATE OF INCORPORATION AND
BYLAWS. In order to insure that the substantive provisions set forth in the
Certificate of Incorporation are not circumvented by the amendment of such
Certificate of Incorporation pursuant to a vote of a majority of the voting
power of the Company's outstanding shares, the Certificate of Incorporation also
provides that any amendment, change or repeal of the provisions contained in the
Certificate of Incorporation with respect to: (i) the Company's capitalization,
(ii) amendment of the Bylaws, (iii) determination by the Board of the number of
directors, (iv) filling Board vacancies, (v) the requirement that stockholder
action be taken at an annual or special meeting, (vi) the calling of a special
meeting of stockholders only by the Board of Directors or by the Chairman of the
Board, (vii) requirements with respect to appraisal rights for stockholders,
(viii) the amendment of the provision imposing such supermajority requirement
for amendment of the Certificate of Incorporation, or (ix) classification of the
Board of Directors, shall require the affirmative vote of the holders of at
least 80% of the voting power of all outstanding shares of voting stock,
including, in any instance where the repeal or amendment is proposed by an
interested stockholder or its affiliate or associate, the affirmative vote of a
majority of the voting power of all outstanding shares of voting stock held by
persons other than such interested stockholder or its affiliates or associates.
However, only the affirmative vote of the majority of the voting power of all
outstanding shares of voting stock is required if the amendment of any of the
foregoing provisions is approved by a majority of the continuing directors.
The Certificate of Incorporation permits the Board of Directors to adopt,
amend or repeal any or all of the Company's bylaws without stockholder action
and provide that such bylaws may also be adopted, amended or repealed by its
stockholders, but only if approved by holders of 80% or more of the voting power
of all outstanding shares of voting stock, including in any instance in which
the alteration is proposed by an interested stockholder or by affiliates or
associate of any interested stockholder, the affirmative vote of the holders of
at least a majority of voting power of all outstanding shares of voting stock
held by persons other than the interested stockholder who proposed such action.
However, the only stockholder vote required if the
56
<PAGE>
modification is approved by a majority of the continuing directors is the
affirmative vote of the majority of the voting power of all outstanding shares
of voting stock.
CLASSIFIED BOARD AND RESTRICTIVE REMOVAL PROVISIONS. The Certificate of
Incorporation provides that at the first annual meeting of the Company's
stockholders after the authorized number of directors is six (6) or more, that
Board of Directors shall be divided into three classes, Class I, Class II and
Class III. The Company's Bylaws authorize the election up to eleven (11)
members on the Company's Board of Directors. As a result, the Company's Board
of Directors has been divided into these three (3) classes with staggered terms.
The initial Class I directors serve for a term of one year, the Class II
directors for a term of two years, and the Class III directors for a term of
three years. Thereafter, all directors shall serve for three year terms. The
effect of these provisions is that not more than one-third of the Company's
directors will be elected at any single annual meeting. As a result, a person
seeking control of the Company may not necessarily be able to acquire a
controlling block of stock and effect an entire change in management at a single
annual meeting.
In addition, the Certificate of Incorporation provides that directors of
the Company may be removed for cause or without cause and only by the
affirmative vote of least 80% of the voting power of all outstanding shares of
the Company's voting stock, thus forcing a third party seeking to gain control
of the Board of Directors to await the expiration of the respective terms of
incumbent directors, unless there was sufficient voting strength to remove a
particular director or directors. The Certificate of Incorporation further
provides, however, that if a majority of the directors approves the removal of
a director for cause or without cause, then the only stockholder vote required
would be that of a majority of the voting power of all outstanding shares of
voting stock.
FAIR PRICE PROVISIONS. Further, under the Company's Certificate of
Incorporation, a broad range of business combinations between the Company or a
subsidiary of the Company, and an interested stockholder or its affiliate or
associate may be effected only if it is approved by one of three methods.
First, a business combination may proceed if it has been approved by the holders
of not less than 80% of the voting power of all outstanding shares of voting
stock, provided such 80% includes a majority of the voting power of all
outstanding shares of voting stock held by persons other than an interested
stockholder that is a party to such business combination or any of its
affiliates or associates. Second, a business combination which has been
approved by a majority of the continuing directors requires only such
stockholder approval, if any, as mandated by law. Third, a business combination
may be approved by a majority of the voting power of all outstanding shares of
voting stock, provided that the terms of such business combination satisfy all
of the minimum price, form of consideration and procedural requirements
described below.
To comply with the form of consideration requirements in the context of a
business combination involving payment of cash or other consideration to
stockholders, the interested stockholder must offer either cash or the same type
of consideration used by the interested stockholder in acquiring the largest
number of shares of Common Stock previously acquired by the interested
stockholder. To satisfy the minimum price requirements, the aggregate amount of
cash and the fair market value of the consideration other than cash to be
received per share by holders of Common Stock in any business combination must
be at least equal to the higher of: (i) the highest per share price paid or
agreed to be paid by the interested stockholder for any shares of Common Stock
during the two (2) year period immediately prior to and including the date of
the final public announcement of the proposed business combination (the
"Announcement Date") or the highest per share price paid in the transaction in
which he became an interested stockholder, whichever is higher; or (ii) the
higher of the fair market value per share of Common Stock on the Announcement
Date or on the date on which the interested stockholder became an interested
stockholder, in every case appropriately adjusted for any stock dividend, stock
split or combination of shares. The fair market value of any non-cash
consideration to be paid to stockholders would be required to meet the above
minimum price condition on the date the business combination is consummated and
is to be determined in good faith as of such date by a majority of the
continuing directors.
57
<PAGE>
In the case of payments to holders of any class or series of the Company's
voting stock other than Common Stock, the per share fair market value of such
payments would have to be at least equal to the higher of: (i) the highest per
share price determined with respect to such class or series of stock in the same
manner as described in clauses (i) and (ii) of the preceding paragraph; or (ii)
the highest preferential amount per share to which the holders of such class or
series of voting stock are entitled in the event of a voluntary or involuntary
liquidation of the Company. The interested stockholder would be required to
meet the minimum price criteria with respect to each class of voting stock,
whether or not the interested stockholder owned shares of that class prior to
proposing the business combination.
If the proposed business combination does not involve the receipt by the
other stockholders of the Company of any cash or other property (such as a sale
of assets or an issuance of the Company's securities to an interested
stockholder), then the price criteria discussed above would not apply and an 80%
vote of stockholders and a majority vote of holders of voting stock other than
the interested stockholder and its affiliates and associates would be required,
unless the transaction were approved by a majority of the continuing directors
and such stockholder vote, if any, required by law.
Finally, an interested stockholder must comply with certain additional
procedural requirements in order to satisfy the minimum price, form of
consideration and procedural requirements alternative. To comply with this
alternative, a stockholder and its affiliates and associates, once such
stockholder has become an interested stockholder and prior to the consummation
of any business combination involving such interested stockholder or any of its
affiliates or associates, may not, with certain exceptions, acquire any shares
of voting stock, even for investment purposes, and may not receive certain
benefits, including loans, from the Company. (If an interested stockholder does
not wish to comply with this alternative, it may acquire additional shares of
voting stock in accordance with applicable law. Such acquisition would not
prevent such interested stockholder from effecting a business combination
approved by the requisite supermajority stockholder vote or by a majority of the
continuing directors in accordance with the other alternatives discussed above.)
For purposes of these antitakover provisions in the Company's Certificate
of Incorporation: (i) an "interested stockholder" is defined as a person (other
than the Company, its subsidiaries or certain employee benefit plans of the
Company) who is, together with its affiliates and associates, the beneficial
owner of 10% or more of the voting power of all outstanding shares of voting
stock (or 10% or more of the voting stock of a subsidiary of the Company), and
includes any person who, in a transaction not involving a public offering, is an
assignee of, or has succeeded to, any shares of voting stock which were at any
time within the prior two (2) year period beneficially owned by an interested
stockholder, and (ii) a "continuing director" is defined as a director (a) who
(1) is not an interested stockholder, (2) is neither an affiliate nor an
associate of an interested stockholder; and (3) was a director prior to the date
on which the interested stockholder became such; or (b) who was elected or
nominated by a majority of the continuing directors.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, assuming no exercise of the
Over-allotment Option, the Company will have ___________ shares of Common Stock
outstanding. All of the ____________ shares of Common Stock sold in this
Offering will be freely transferable without further restriction or registration
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company (as defined under the Securities Act).
As of the date of this Prospectus, the Company had issued and outstanding
___________ shares of Common Stock. There are currently 38,855,941 shares of
Common Stock which are restricted shares and __________ shares which are freely
tradeable or eligible to have the restrictive legend removed pursuant to Rule
144(k) promulgated under the Securities Act. Of the restricted shares,
_________ shares have been held for at least one year from the date of this
Prospectus and, in the absence of agreements with the Representatives, are
currently eligible for resale under Rule 144. Of the restricted shares,
_________ shares held by certain of the Company's officers and directors will be
subject to certain lock-up agreements with the
58
<PAGE>
Representatives during the ____________ (________) month period following the
date of this Prospectus. Further, the Company has issued and outstanding
options to purchase up to 5,394,450 shares of Common Stock, 614,298 of which
are currently exercisable, and warrants to purchase up to 864,298 shares of
Common Stock, 614,298 of which warrants have certain demand and piggyback
registration rights. The Company has filed a registration statement which
registers ___________ shares of Common Stock underlying certain of the
currently exercisable options, and holders of options to purchase an
additional ____________ shares have certain demand and piggyback registration
rights in connection with such options.
Holders of restricted securities must comply with the requirements of Rule
144 in order to sell their shares in the open market. In general, under Rule
144 as currently in effect, any affiliate of the Company and any person (or
persons whose sales are aggregated) who has beneficially owned his or her
restricted shares for at least two years, may be entitled to sell in the open
market within any three-month period in brokerage transactions or to
marketmakers a number of shares that does not exceed the greater of: (i) 1% of
the then outstanding shares of the Company's Common Stock (approximately
__________ shares immediately after this Offering), or (ii) the average weekly
trading volume reported in the principal market for the Company's Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain limitations on manner of sale, notice requirement and
availability of current public information about the Company. Nonaffiliates who
have held their restricted shares for three years are entitled to sell their
shares under Rule 144 without regard to any of the above limitations, provided
they have not been affiliates of the Company for the three months preceding such
sale. An aggregate of ___________ shares of Common Stock will be reserved for
issuance to employees of the Company pursuant to the Company's Stock Option
Plans.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of the Common
Stock, as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriters named below, and
each of the Underwriters, for whom the Representatives are acting as
Representatives, have severally and not jointly agreed to purchase the number of
Shares set forth opposite their respective names in the table.
NAME OF UNDERWRITER NUMBER OF SHARES
------------------- ----------------
Nichols, Safina, Lerner & Company. . . . . .
Total . . . . . . . . . . . . . . . . .
The nature of the obligations of the Underwriters is such that if any of
the Shares offered hereby are purchased, all must be purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Shares to the public at the Price to Public set
forth on the cover page of this Prospectus and to certain selected dealers at
such price less customary concessions. The Underwriters may allow $________ as
concessions to certain dealers. Each of the concessions allowed will be to
members of the National Association of Securities Dealers, Inc. After the
initial public offering, concessions and other selling terms may be changed by
the Representatives.
59
<PAGE>
The Company has granted an option to the Underwriters, exercisable within
forty-five (45) days of the date of this Prospectus, to purchase up to ________
additional Shares at the public offering price, less the underwriting discount,
as set forth on the cover page of this Prospectus. This option may be exercised
only for the purpose of covering over-allotments which may be made in connection
with the sale of the Shares offered hereby.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of three percent (3%) of the total proceeds of this Offering,
including any Shares purchased pursuant to the Over-allotment Option, of which
$_________ has already been paid.
The Company has agreed to sell to the Representatives, for nominal
consideration, warrants (the "Underwriters' Warrants") to purchase up to _______
shares of Common Stock. The Underwriters' Warrants are exercisable for a period
of four (4) years commencing one year after the date of this Prospectus. The
Underwriters' Warrants are exercisable at a price of ________% of the price at
which the Shares are initially offered to the public. The Underwriters'
Warrants may not be sold, transferred, assigned or hypothecated for one year
except to persons who are officers of an Underwriter. The Underwriters'
Warrants contain anti-dilution provisions providing for appropriate adjustments
upon the occurrence of certain events, and contain one-time demand and unlimited
participatory registration rights.
Certain of the Company's officers and directors, and certain other
stockholders of the Company have agreed that, for a period of up to ___________
(____) months after the date of this Prospectus, they will not, without the
prior written consent of the Representatives, sell or otherwise dispose of any
of their shares of Common Stock. See "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they have discretionary authority.
The Underwriting Agreement contains reciprocal agreements of indemnity
between the Company and the Underwriters as to certain liabilities in connection
with this Offering, including liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act, may be
permitted pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. 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 Underwriters 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
affected on the NASDAQ/NMS or otherwise and, if commenced, may be discontinued
at any time and will, in any event, be discontinued thirty (30) days after
settlement of this Offering.
The foregoing is a brief summary of the provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the Underwriting Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
Prior to this Offering, the Company's Common Stock has been listed in the
Over-the-Counter Market Shares. In connection with this Offering, the Company
has agreed to apply for a listing of the Common Stock in the NASDAQ/NMS. The
public offering price for the Shares will be determined by negotiations between
the Company and the Representatives. The factors considered in determining the
public offering price include
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<PAGE>
the market price of the Common Stock, the Company's growth since its
organization, the industry in which it operates, the Company's business
potential and earning prospects and the general condition of the securities
markets at the time of the Offering. The Representatives have informed the
Company that it currently intends to make a market in the Company's securities
subsequent to the effectiveness of the Offering. But there can be no assurance
that the Representatives will take any action to make such a market.
LEGAL MATTERS
Certain matters with respect to the validity of the Shares offered hereby
will be passed upon for the Company by Matthias & Berg LLP, Los Angeles,
California. The Underwriters are represented by Lehman & Eilen, Uniondale, New
York.
EXPERTS
The audited financial statements of the Company as of December 31, 1996,
1995 and 1994 and the related statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1996, 1995 and 1994, included
elsewhere in this Prospectus, have been so included in reliance on the report of
Singer Lewak Greenbaum & Goldstein LLP (successors to the practice of Shillan
Abrams & Company), independent certified public accountants, given on the
authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Securities offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Securities,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. Statements made in this Prospectus as to the contents
of any contract or any other document referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference to such exhibits. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Public Reference Room of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission at 7 World Trade Center, Suite 1300, New
York, New York 10048; and at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of the Registration Statement and the exhibits and
schedules thereto may be obtained from the Public Reference Room of the
Commission at its principal office in Washington, D.C. at prescribed rates. In
addition, such materials may be accessed electronically at the Commission's site
on the World Wide Web, located at http://www.sec.gov.
The Company is currently subject to the reporting requirements of the
Exchange Act and in accordance therewith files reports, proxy and information
statements and other information with the Commission. Such reports, proxy and
information statements and other information may be inspected and copied at the
Public Reference Room of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington D.C. 20549; and at the regional offices of the Commission at 7
World Trade Center, Suite 1300, New York, New York 10048; and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of such
materials can be obtained from the Public Reference Section of the Commission at
its principal office in Washington, D.C. at prescribed rates. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.
61
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
CONTENTS
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity 4 - 5
Statements of Cash Flows 6 - 8
Notes to Financial Statements 9 - 23
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
International Meta Systems, Inc.
We have audited the accompanying balance sheet of International Meta Systems,
Inc. as of December 31, 1996 and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Meta Systems,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows, for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred net losses of $7,134,779 and $1,711,596 for the years ended
December 31, 1996 and 1995, respectively. This factor, as discussed in Note 1
to the financial statements, raises substantial doubt about the Company's
ability to continue as a going concern. Management's plan in regard to this
matter is also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 21, 1997
F-2
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1996 1997
------------ -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Note 2) $ 96,782 $ 44,308
Marketable securities (Note 3) 4,448,484 533,437
Prepaid expenses and other current assets 40,824 36,582
----------- -----------
Total current assets 4,586,090 614,327
FURNITURE AND EQUIPMENT, net (Note 4) 717,123 948,247
PATENTS 98,707 126,519
DEFERRED OFFERING COSTS - 25,000
----------- -----------
TOTAL ASSETS $ 5,401,920 $ 1,714,093
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note 8) $ - $ 320,000
Accounts payable 257,972 738,447
Accrued payroll and payroll taxes 167,275 -
Dividends payable 40,000 39,945
----------- -----------
Total current liabilities 465,247 1,098,392
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
STOCKHOLDERS' EQUITY (Note 5)
Preferred stock, $.0001 par value, 1,000,000 shares authorized
Series A convertible preferred stock
10,000 and 0 (unaudited) shares issued and outstanding 1 -
Series B convertible preferred stock
250 and 250 (unaudited) shares issued and outstanding 1 1
Common stock, $.0001 par value
70,000,000 shares authorized
37,497,100 and 38,784,507 (unaudited) shares issued and
outstanding 3,749 3,878
Additional paid-in capital 18,563,923 18,951,331
Subscription receivable (24,120) (18,900)
Accumulated deficit (13,606,881) (18,320,609)
----------- -----------
Total stockholders' equity 4,936,673 615,701
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,401,920 $ 1,714,093
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1996 1995 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES (Note 1)
License $ - $ 309,988 $ - $ -
Contract 300,000 600,000 - -
----------- ----------- ----------- -----------
Total revenues 300,000 909,988 - -
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Research and development 3,884,963 666,287 2,781,655 1,413,286
Selling, general, and
administrative 2,612,600 1,341,964 1,837,327 1,181,921
Depreciation and amortization 1,208,232 617,613 115,852 320,299
----------- ----------- ----------- -----------
Total operating costs and
expenses 7,705,795 2,625,864 4,734,834 2,915,506
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (7,405,795) (1,715,876) (4,734,834) (2,915,506)
OTHER INCOME (EXPENSE)
Interest income 21,829 5,066 3,436 17,187
Dividend income 285,120 - 58,670 116,436
Interest expense (4,060) (786) - (4,037)
Loss on marketable securities (31,873) - - (44,244)
----------- ----------- ----------- -----------
NET LOSS $(7,134,779) $(1,711,596) $(4,672,728) $(2,830,164)
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE $ (.20) $ (.06) $ (.12) $ (.09)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 35,117,725 26,651,601 37,668,862 32,781,554
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ $ 26,517,792 $ 2,651
ISSUANCE OF SERIES A
PREFERRED STOCK (Note 5) 9,800 1
ISSUANCE OF SERIES B
PREFERRED STOCK (Note 5) 250 1
ISSUANCE OF COMMON STOCK (Note 5) 540,000 54
OFFERING COSTS
ISSUANCE OF SERIES A PREFERRED
STOCK FOR OFFERING COSTS (Note 5) 200
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES 109,663 11
EXERCISE OF OPTIONS 228,000 23
AMORTIZATION OF DEFERRED
COMPENSATION
DIVIDENDS DECLARED
NET LOSS
----------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 10,250 2 27,395,455 2,739
ISSUANCE OF COMMON STOCK (Note 5) 9,500,000 950
OFFERING COSTS
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES 37,461 4
EXERCISE OF OPTIONS 522,909 52
CONVERSION OF DIVIDENDS PAYABLE
TO COMMON STOCK 41,275 4
AMORTIZATION OF DEFERRED
COMPENSATION
REPRICING OF STOCK OPTIONS (Note 5)
DIVIDENDS DECLARED
NET LOSS
----------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 10,250 2 37,497,100 3,749
<CAPTION>
ADDITIONAL COMMON
PAID-IN STOCK DEFERRED ACCUMULATED
CAPITAL SUBSCRIBED COMPENSATION DEFICIT TOTAL
---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $7,033,720 $ (48,375) $ (212,000) $ (4,651,784) $2,124,212
ISSUANCE OF SERIES A
PREFERRED STOCK (Note 5) 979,999 980,000
ISSUANCE OF SERIES B
PREFERRED STOCK (Note 5) 24,999 25,000
ISSUANCE OF COMMON STOCK (Note 5) 519,946 520,000
OFFERING COSTS (58,121) (58,121)
ISSUANCE OF SERIES A PREFERRED
STOCK FOR OFFERING COSTS (Note 5)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES 97,159 97,170
EXERCISE OF OPTIONS 55,977 48,375 104,375
AMORTIZATION OF DEFERRED
COMPENSATION 122,928 122,928
DIVIDENDS DECLARED (27,850) (27,850)
NET LOSS (1,711,596) (1,711,596)
---------- ---------- ------------ ------------ ----------
BALANCE, DECEMBER 31, 1995 8,653,679 - (89,072) (6,391,230) 2,176,118
ISSUANCE OF COMMON STOCK (Note 5) 9,499,050 9,500,000
OFFERING COSTS (62,078) (62,078)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES 51,216 51,220
EXERCISE OF OPTIONS 173,243 (24,120) 149,175
CONVERSION OF DIVIDENDS PAYABLE
TO COMMON STOCK 68,718 68,722
AMORTIZATION OF DEFERRED
COMPENSATION 89,072 89,072
REPRICING OF STOCK OPTIONS (Note 5) 180,095 180,095
DIVIDENDS DECLARED (80,872) (80,872)
NET LOSS (7,134,779) (7,134,779)
---------- ---------- ------------ ------------ ----------
BALANCE, DECEMBER 31, 1996 18,563,923 (24,120) - (13,606,881) 4,936,673
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock
--------------------------- --------------------------
Shares Amount Shares Amount
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CONVERSION OF SERIES A PREFERRED STOCK
TO COMMON STOCK (unaudited) (Note 5) (10,000) $ (1) 1,052,632 $ 105
OFFERING COSTS (unaudited)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES (unaudited) 70,750 8
EXERCISE OF OPTIONS (unaudited) 133,332 13
CONVERSION OF DIVIDENDS PAYABLE
TO COMMON STOCK (unaudited) 30,693 3
REPRICING OF STOCK OPTIONS (unaudited)
(Note 5)
DIVIDENDS DECLARED (unaudited)
NET LOSS (unaudited)
----------- ---------- ---------- ----------
BALANCE, JUNE 30, 1997 (UNAUDITED) 250 $ 1 38,784,507 $ 3,878
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
<CAPTION>
Additional Common
Paid-in Stock Deferred Accumulated
Capital Subscribed Compensation Deficit Total
----------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
CONVERSION OF SERIES A PREFERRED STOCK
TO COMMON STOCK (unaudited) (Note 5) $ (104) $ - $ - $ - $ -
OFFERING COSTS (unaudited) (10,000) (10,000)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES (unaudited) 96,758 96,766
EXERCISE OF OPTIONS (unaudited) 143,767 5,220 149,000
CONVERSION OF DIVIDENDS PAYABLE
TO COMMON STOCK (unaudited) 41,052 41,055
REPRICING OF STOCK OPTIONS (unaudited)
(Note 5) 115,935 115,935
DIVIDENDS DECLARED (unaudited) (41,000) (41,000)
NET LOSS (unaudited) (4,672,728) (4,672,728)
----------- ---------- ------------ ------------ ----------
BALANCE, JUNE 30, 1997 (UNAUDITED) $18,951,331 $ (18,900) $ - $(18,320,609) $ 615,701
----------- ---------- ------------ ------------ ----------
----------- ---------- ------------ ------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Years Ended For The Six Months Ended
December 31, June 30,
-------------------------- ---------------------------
1996 1995 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(7,134,779) $(1,711,596) $(4,672,728) $(2,830,164)
Non-cash items included in
net loss
Issuance of common stock
for services 51,220 97,170 96,766 15,800
Loss on repricing of stock
options 180,095 - 115,935 -
Loss on sale of marketable
securities 31,873 - - 44,256
Depreciation 127,171 77,083 115,851 43,562
Amortization of software
development costs 1,081,061 540,530 - 276,736
Amortization of deferred
compensation 89,072 122,928 - 61,374
(Increase) decrease in
Inventory 20,818 (10,818) - -
Prepaid expenses and other
current assets (2,513) (12,586) 4,242 15,072
Increase (decrease) in
Accounts payable and
accrued expenses 289,386 24,828 313,200 10,759
----------- ----------- ----------- -----------
Net cash used in operating
activities (5,266,596) (872,461) (4,026,734) (2,362,605)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of marketable
securities (8,471,269) - (377,953) (8,741,956)
Proceeds from sale of
marketable securities 3,990,912 - 4,293,000 850,000
Acquisition of furniture
and equipment (606,622) (159,025) (346,975) (245,255)
Increase in patent costs (42,576) (9,637) (27,812) (7,074)
----------- ----------- ----------- -----------
Net cash (used in) provided by
investing activities (5,129,555) (168,662) 3,540,260 (8,144,285)
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Years Ended For The Six Months Ended
December 31, June 30,
------------------------- --------------------------
1996 1995 1997 1996
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Bank overdraft $ - $ - $ - $ 120,453
Proceeds from issuance of
preferred stock - 1,005,000 - -
Proceeds from issuance of
common stock 9,649,175 624,375 133,780 9,563,338
Proceeds from note payable - - 320,000 -
Decrease (increase) in
subscription receivable - - 5,220 (27,945)
Payments on capitalized
leases payable (13,581) (20,526) - (5,669)
Offering costs (62,078) (58,121) (25,000) (62,704)
---------- ---------- ---------- ----------
Net cash provided by financing
activities 9,573,516 1,550,728 434,000 9,587,473
---------- ---------- ---------- ----------
Net (decrease) increase in cash
and cash equivalents (822,635) 509,605 (52,474) (919,417)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 919,417 409,812 96,782 919,417
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 96,782 $ 919,417 $ 44,308 $ -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During the years ended December 31, 1996 and 1995 and the six months ended June
30, 1997 and 1996, interest paid was $4,060, $786, $0 (unaudited), and $4,037
(unaudited).
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1996 and the six months ended June 30, 1996,
81,425 and 85,822 (unaudited) shares of common stock from the exercise of
options were subscribed for with a subscription receivable in the amount of
$24,120 and $27,945 (unaudited).
During the year ended December 31, 1996, the Company converted dividends payable
in the amount of $68,722 into 41,275 shares of common stock. During the six
months ended June 30, 1997, the Company converted dividends payable in the
amount of $41,055 (unaudited) into 30,693 (unaudited) shares of common stock.
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
During the year ended December 31, 1996 and the six months ended June 30, 1997,
the Company declared dividends amounting to $80,872 and $41,000 (unaudited),
respectively
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS
International Meta Systems, Inc. (the "Company") was incorporated in
Delaware on May 4, 1987. The Company is engaged in the design and
development of microprocessors which are the heart of computers and many
other electronic devices.
FINANCIAL CONDITION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of
the Company as a going concern. However, the Company has sustained
substantial losses of $7,134,779 and $1,711,596 in 1996 and 1995,
respectively. In addition, the Company has used, rather than provided,
cash from its operations. In view of the matters described above,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn, is dependent upon the Company's ability to
continue to meet its financing requirements and to succeed in its future
operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management plans to raise capital during 1997 either through a private
placement or secondary public offering which it expects will provide
sufficient funding to continue present operations and support future
marketing and development activities.
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
disclosures of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
For purpose of the statements of cash flow, the Company considers all
highly liquid instruments purchased with original maturities of three
months or less or be cash equivalents.
NON-MONETARY TRANSACTIONS
The Company accounts for its non-monetary transactions based on the fair
value of the asset or liability that is received or surrendered, whichever
is more clearly evident.
F-10
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS
The cost of patents acquired is being amortized on the straight-line method
over their useful lives of 17 years.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over estimated
useful lives of two to five years.
SOFTWARE DEVELOPMENT COSTS
Certain software development costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility and is discontinued when the
product is available for sale. The establishment of technological
feasibility and the ongoing assessment for recoverability of capitalized
software development costs require considerable judgment by management with
respect to certain external factors, including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated
economic life, and changes in software and hardware technologies.
Amortization of capitalized software development costs is provided on a
product by product basis on the straight-line method over the remaining
estimated economic life of the product (not to exceed three years).
Management periodically compares estimated net realizable value by product
to the amount of software development costs capitalized for that product to
ensure the amount capitalized is not in excess of the amount to be
recovered through revenues. Any such excess of capitalized software
development cost to expected net realizable value is expensed at that time.
During 1996, management reevaluated the economic useful life of the product
and determined they should be amortizing the capitalized software
development costs over two years instead of three years. Accordingly, as
of December 31, 1996, software development costs of $1,081,061 in aggregate
were fully amortized.
REVENUE RECOGNITION
LICENSE
The Company recognizes revenues related to software licenses upon
shipment of the product, provided that no significant vendor or
post-contract support obligations remain outstanding.
F-11
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (Continued)
JOINT PRODUCTION AGREEMENT (CONTRACT)
The Company has a production agreement under which it is developing
certain computer processing products. Under this agreement, it can
receive a total of $2,500,000. Payments under this agreement will be
received upon reaching milestones that are defined in the agreement.
The Company recognizes income from its joint production agreement upon
the reaching of defined milestones. The agreement may be terminated
if milestones are not met, but payments already received are not
required to be returned. The party to this agreement has also
provided certain personnel and equipment for use during the
development period. Upon completion of the development phase, the
products will be manufactured by the partner to the agreement and the
Company will receive royalties based upon sales of the product.
In 1996 and 1995, the Company received $300,000 and $600,000,
respectively, of payments under this agreement. Subsequent to June
30, 1997, the Company received $150,000 (unaudited) of payments under
this agreement.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. These
costs consist primarily of salaries and consulting fees.
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes." The
asset and liability method requires the recognition of deferred tax assets
and liabilities for the future tax consequences of temporary differences
between the financial statement basis and the tax basis of assets and
liabilities.
NET LOSS PER SHARE
Net loss per common share is based on the weighted-average number of common
shares outstanding during the year. The shares to be issued upon exercise
of outstanding stock options, warrants, and convertible preferred stock are
not included as they are anti-dilutive.
F-12
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") issued SFAS No. 128,
"Earnings Per Share," which is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods.
SFAS No. 128 requires public companies to present basic earnings per share
and, if applicable, diluted earnings per share instead of primary and
fully-diluted earnings per share. The Company does not believe that
diluted earnings per share in accordance with SFAS No. 128 will be
materially different from the earnings per share previously reported.
SFAS No. 129, "Disclosure of Information about Capital Structures," issued
by FASB is effective for financial statements ending after December 15,
1997. The new standard reinstates various securities disclosure
requirements previously in effect under Accounting Principles Bulletin
("APB") Opinion No. 15, "Computing Earnings per Share," which has been
superseded by SFAS No. 128. The Company does not expect adoption of SFAS
No. 129 to have a material effect, if any, on its financial position or
results of operations.
SFAS No. 130, "Reporting Comprehensive Income," issued by FASB is effective
for financial statements with fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company does not expect adoption of SFAS No. 130
to have a material effect, if any, on its financial position or results of
operations.
NOTE 2 - CASH
The Company maintains cash deposits at several banks located in California.
Deposits at each bank are insured by the Federal Deposit Insurance
Corporation up to $100,000. In addition, the Company also had deposits with
an uninsured financial institution. As of December 31, 1996 and June 30,
1997, uninsured portions of balances held at this financial institution
totaled $139,822 and $0 (unaudited), respectively. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and cash equivalents.
F-13
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3 - MARKETABLE SECURITIES
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company classifies its investment in
marketable equity securities as trading. Trading securities are carried at
fair value with the unrealized gains and losses reported as a separate
component of other income/expenses. As of December 31, 1996 and June 30,
1997 (unaudited), the Company owned shares in a Merrill Lynch Institutional
Fund which are uninsured.
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
December 31, June 30,
1996 1997
------------ ------------
(unaudited)
Machinery and equipment $ 883,130 $ 1,221,389
Production tooling 323,649 323,649
Office equipment 39,138 39,138
Furniture and fixtures 46,293 55,020
Equipment under capitalized leases 49,670 49,670
------------ ------------
1,341,880 1,688,866
Less accumulated depreciation (including
$49,670 at 1997 and 1996 for capitalized
leases) 624,757 740,619
------------ ------------
TOTAL $ 717,123 $ 948,247
------------ ------------
------------ ------------
NOTE 5 - STOCKHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
In 1995, the Company sold 9,800 shares of Series A Convertible Preferred
Stock ("Series A Preferred") for a price of $100 per share. The Company
also issued 200 shares of Series A Preferred for offering costs. The
holders of the Series A Preferred are entitled to receive a cumulative
preferential dividend of $8.00 per share per annum, payable semi-annually
in cash or shares of common stock, at the option of the Company.
F-14
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
SERIES A CONVERTIBLE PREFERRED STOCK (Continued)
The Series A Preferred will be automatically converted into shares of
common stock at the conversion price of $0.95 per share on June 30, 1997.
In addition, the Company may convert the Series A Preferred into shares of
common stock at the conversion price after the common stock has been
trading at an average price of $3.00 per share for twenty consecutive days.
The Series A Preferred is convertible at the option of the holder prior to
June 30, 1997.
The Series A Preferred has a liquidation preference of $100 per share plus
all accrued and unpaid dividends prior to the payment of any amount to
holders of any other equity securities of the Company.
UNAUDITED
On June 30, 1997, all 10,000 (unaudited) shares of Series A Preferred was
converted into 1,052,632 (unaudited) shares of common stock.
SERIES B CONVERTIBLE PREFERRED STOCK
In 1995, the Company sold 250 shares of Series B Convertible Preferred
Stock ("Series B Preferred") for a price of $100 per share. The holders of
the Series B Preferred are entitled to receive a cumulative preferential
dividend of $8.00 per share per annum, payable semi-annually in cash or
shares of common stock, at the option of the Company.
The Series B Preferred will be automatically converted into shares of
common stock at the conversion price of $1.25 per share on November 30,
1997. In addition, the Company may convert the Series B Preferred into
shares of common stock at the conversion price after the common stock has
been trading at an average price of $3.00 per share for twenty consecutive
days. The Series B Preferred is convertible at the option of the holder
prior to November 30, 1997.
The Series B Preferred has a liquidation preference of $100 per share plus
all accrued and unpaid dividends, following payment of accrued and unpaid
dividends and payment of the liquidation preferences of the Series A
Preferred.
ISSUANCE OF COMMON SHARES
During the year ended December 31, 1996, the Company sold 9,500,000 shares
of common stock in two private placements for a total of $9,437,922, net of
offering costs.
F-15
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
ISSUANCE OF COMMON SHARES (Continued)
During the year ended December 31, 1995, the Company sold 540,000 shares of
common stock in a private placement for a total of $520,000 before offering
expenses.
During the years ended December 31, 1996 and 1995 and the six months ended
June 30, 1997, the Company issued 37,461, 109,663, and 70,750 (unaudited)
shares of common stock, respectively, in exchange for services rendered.
STOCK OPTION PLANS
The Company has adopted three stock option plans, the 1993 Incentive Stock
Option Plan, the 1993 Nonqualified Stock Option Plan, and the 1996 Stock
Option Plan. Incentive and nonqualified options under these plans may be
granted to employees, officers, directors, and consultants of the Company.
There are 9,000,000 shares of common stock reserved for issuance under
these plans. The exercise price of the options are determined by the board
of directors, but in the case of an incentive stock option, the exercise
price may not be less than 100% of the fair market value on the date of
grant. Options vest over periods not to exceed ten years.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its plans and does not recognize compensation expense for
its stock-based compensation plans other than for restricted stock and
options issued to outside third parties. If the Company had elected to
recognize compensation expense based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed by
SFAS 123, the Company's net loss and loss per share would be reduced to the
pro forma amounts indicated below:
Six Months
Year Ended Ended
December 31, June 30,
Millions, except for share amounts 1996 1997
------------ -----------
(unaudited)
Net loss
As reported $ 7,135 $ 4,673
Pro forma $ 7,169 $ 4,759
Loss per common share
As reported $ (.20) $ (.12)
Pro forma $ (.20) $ (.12)
F-16
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (Continued)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants made before 1995. Pro forma amounts do take into effect pro
forma compensation expense relating to 1995 grants, which were affected by
the repricing in 1996 (see below). The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for the year ended December
31, 1996 and the six months ended June 30, 1997: dividend yields of 0% and
0% (unaudited), respectively; expected volatility of 35% and 80%
(unaudited), respectively; risk-free interest rates of 7% and 7%
(unaudited), respectively; and expected life of 1.5 years and 1.5 years
(unaudited), respectively. The weighted-average fair value of options
granted during the year ended December 31, 1996 for which the exercise
price equaled the market price on the grant date, which were subsequently
repriced (see below) was $0.48, and the weighted-average exercise price
(repriced) was $1.00 (see below).
The weighted average fair value of options granted during the six months
ended June 30, 1997 was $0.57 (unaudited), the weighted average stock price
at the date of grant was $1.39 (unaudited), and the weighted average
exercise price was $1.35 (unaudited).
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The following summarizes the Company's stock option transactions under the
stock option plans:
F-17
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (Continued)
Shares Under Option Price
Option Per Share
------------ ------------
Options outstanding, December 31, 1994 1,388,000 .125 - 1.37
Granted 1,165,000 .75 - 2.43
Canceled/Expired (235,000) .40 - 1.37
Exercised (228,000) .125 - 1.25
------------
Options outstanding, December 31, 1995 2,090,000 .125 - 2.43
Granted 1,760,000 1.06 - 2.31
Canceled/Expired (725,000) .87 - 1.93
Exercised (144,832) .01 - 1.75
------------
Options outstanding, December 31, 1996 2,980,168 .40 - 2.43
Granted (unaudited) 742,000 1.00 - 1.47
Canceled/Expired (unaudited) (310,000) 1.00 - 1.34
Exercised (unaudited) (133,332) .40 - 1.00
------------
OPTIONS OUTSTANDING, JUNE 30, 1997
(UNAUDITED) 3,278,836 $.00 - 1.78
------------
------------
At December 31, 1996 and June 30, 1997, 760,166 and 888,333 (unaudited)
options were exercisable.
During the year ended December 31, 1996, the Company repriced options to
employees which had exercise prices of $1.00 or higher. The new exercise
price for these options is $1.00, which was below the market price at the
repricing date. Since the options vest over five years, the difference
between the original option price and $1.00 is expensed over five years.
During the year ended December 31, 1996 and the six months ended June 30,
1997, the Company recorded an additional expense of $180,095 and $115,935
(unaudited) and the remaining $684,975 will be expensed over the next 3.5
years.
F-18
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
OTHER OPTIONS
In addition to options issued pursuant to the stock option plans, the
Company has issued additional options to officers, directors, consultants,
and others. The following summarizes the Company's other stock option
transactions:
<TABLE>
<CAPTION>
Shares Under Option Price
Option Per Share
------------ ------------
<S> <C> <C>
Options outstanding, December 31, 1993 2,954,391 $ .01 - 1.25
Canceled/Expired (34,090) .22 - .30
Exercised (517,424) .01 - .10
------------
Options outstanding, December 31, 1994 and 1995 2,402,877 .01 - .75
Granted 315,000 .65 - .81
Canceled/Expired (331,850) .30 - .65
Exercised (378,077) .01 - .81
------------
Options outstanding, December 31, 1996 2,007,950 .30 - .81
Granted (unaudited) 580,000 1.18 - 1.65
Canceled/Expired (unaudited) (155,000) .65 - 1.65
Exercised (unaudited) - -
------------
OPTIONS OUTSTANDING, JUNE 30, 1997
(UNAUDITED) 2,432,950 $.30 - 1.65
------------
------------
</TABLE>
At December 31, 1996 and June 30, 1997, 1,717,950 and 1,907,950 (unaudited)
options were exercisable.
In December 1994, the Company extended certain options until September
1996, resulting in deferred compensation being recognized in the amount of
$212,000. As of December 31, 1996, the above deferred compensation was
fully amortized.
F-19
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
In connection with a private placement of common stock in 1994, 460,000
warrants to purchase common stock at $2.50 per share were issued, which
originally expired in October 1996. In 1996, the Company extended the
expiration date to April 30, 1997. As of June 30, 1997 (unaudited), the
warrants have expired.
NOTE 6 - INCOME TAXES
No provision for income taxes has been provided due to the net loss. As of
December 31, 1996 and June 30, 1997, the Company had federal net operating
loss carryforwards of approximately $15,250,000 and $12,700,000
(unaudited), respectively, which expire at various amounts through 2011 and
2012, respectively. The Company also has approximately $147,000 and
$475,000 (unaudited) of federal research and development tax credit
carryforwards for the year ended December 31, 1996 and the six months ended
June 30, 1997 (unaudited).
Significant components of the Company's deferred tax liabilities and assets
for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1996 1997
------------ -----------
(unaudited)
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 5,869,000 $ 4,794,000
Tax credits 491,000 748,000
Depreciation and amortization costs - 2,290,000
Other 6,000 201,000
------------ -----------
Total deferred tax assets 6,366,000 8,033,000
Valuation allowance for deferred tax assets 6,366,000 8,033,000
------------ -----------
NET DEFERRED TAX ASSETS $ - $ -
------------ -----------
------------ -----------
</TABLE>
The net change in the valuation allowance for the year ended December 31,
1996 and June 30, 1997 was an increase of $3,528,000 and $1,667,000
(unaudited), respectively.
F-20
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS
The Company leases certain facilities for its corporate offices under
long-term lease agreements. Minimum annual rental commitments under these
leases are as follows:
Year Ending
December 31,
------------
1997 $ 213,651
1998 218,585
1999 121,355
2000 101,909
Thereafter 42,462
----------
TOTAL $ 697,962
----------
----------
Rent expense was $182,187 and $84,326 for the years ended December 31, 1996
and 1995, respectively, and $110,157 (unaudited) and $91,525 (unaudited)
for the six months ended June 30, 1997 and 1996, respectively.
EMPLOYMENT AGREEMENTS (UNAUDITED)
On February 3, 1997, the Company entered into a three-year employment
agreement with the Company's President to pay an annual base salary of
$130,000 plus other benefits.
NOTE 8 - UNSECURED PROMISSORY NOTES
In June 1997, the Company entered into unsecured promissory notes of
$320,000 which bear interest at 8% per annum. The notes are payable the
earlier of (i) five business days following the closing of a secondary
public offering of the Company's securities or (ii) one year following the
date of the note.
F-21
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 8 - UNSECURED PROMISSORY NOTES (CONTINUED)
In addition, for each $5,000 principal amount of notes subscribed, the
holder will receive 7,143 warrants to purchase shares of the Company's
common stock. The warrants are exercisable at an exercise price equal to
(i) 100% of the per share public offering price, in the event that the
shares shall be registered in connection with an effective registration
statement related to a secondary public offering of the Company's
securities on or before December 31, 1997 or (ii) 75% of the average
closing bid price for the common stock over the five trading-day period
ending on the day preceding the date of exercise of the warrant, in the
event that the common shares shall not be registered and the public
offering shall not be completed on or before December 31, 1997. The shares
will be restricted from transfer or resale during the six months following
the effective date of the secondary public offering and have certain demand
and piggyback registration rights.
In connection with the above notes, 457,152 warrants to purchase the
Company's common stock were issued. The warrants expire on July 31, 2002.
NOTE 9 - SUBSEQUENT EVENTS (UNAUDITED)
CONVERTIBLE PROMISSORY NOTE (NOTE 1)
On July 15, 1997, the Company entered into a convertible promissory note of
$1,500,000. The note bears interest at 8% per annum. The principal amount
together with the accrued and unpaid interest is payable on July 15, 1998.
The holder of the note has the option at any time to convert the
outstanding principal together with accrued and unpaid interest into shares
of the Company's common stock at a per share conversion rate equal to the
aggregate principal together with accrued and unpaid interest, divided by
the lower of (i) $1.00, subject to adjustments for stock splits, reverse
splits, stock dividends, or recapitalizations of the common stock and (ii)
75% of the average of the mean between the closing bid and asked prices for
the common stock during the five trading days preceding the notice date of
the exercise of such option. Further, the Company has the right to require
the holder at any time prior to July 15, 1998, to convert the outstanding
principal together with accrued and unpaid interest, if the mean between
the closing bid and asked prices of the common stock is greater than $2.00
per share, subject to adjustments for stock splits, reverse splits, stock
dividends, or recapitalizations.
F-22
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 9 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
CONVERTIBLE PROMISSORY NOTE (NOTE 2)
On September 16, 1997, the Company entered into a convertible promissory
note of $500,000. The note bears interest at 8% per annum. The principal
amount together with the accrued and unpaid interest is payable on
September 16, 1998. The holder of the note has the option at any time to
convert the outstanding principal together with accrued and unpaid interest
into shares of the Company's common stock at a per share conversion rate
equal to the aggregate principal together with accrued and unpaid interest,
divided by the lower of (i) $.50, subject to adjustments for stock splits,
reverse splits, stock dividends, or recapitalizations of the common stock
and (ii) 75% of the average of the mean between the closing bid and asked
prices for the common stock during the five trading days preceding the
notice date of the exercise of such option. Further, the Company has the
right to require the holder at any time prior to September 16, 1998, to
convert the outstanding principal together with accrued and unpaid
interest, if the mean between the closing bid and asked prices of the
common stock is greater than $2.00 per share, subject to adjustments for
stock splits, reverse splits, stock dividends, or recapitalizations.
UNSECURED PROMISSORY NOTES
In August 1997, the Company entered into unsecured promissory notes of
$110,000 which bear interest at 8% per annum. The notes are payable the
earlier of (i) five business days following the closing of a secondary
public offering of the Company's securities or (ii) one year following the
date of the note.
In addition, for each $5,000 principal amount of notes subscribed, the
holder will receive 7,143 warrants to purchase shares of the Company's
common stock. The warrants are exercisable at an exercise price equal to
(i) 100% of the per share public offering price, in the event that the
shares shall be registered in connection with an effective registration
statement related to a secondary public offering of the Company's
securities on or before December 31, 1997 or (ii) 75% of the average
closing bid price for the common stock over the five trading-day period
ending on the day preceding the date of exercise of the warrant, in the
event that the common shares shall not be registered and the public
offering shall not be completed on or before December 31, 1997. The shares
will be restricted from transfer or resale during the six months following
the effective date of the secondary public offering and have certain demand
and piggyback registration rights.
In connection with the above notes, 157,146 warrants to purchase the
Company's common stock were issued. The warrants expire on July 31, 2002.
F-23
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED.)
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 9 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
STOCK OPTIONS
Subsequent to June 30, 1997, the Company granted 170,000 stock options with
exercise prices which range from $0.59 to $1.19 per share. In addition,
486,000 shares expired.
PROMISSORY NOTE
On October 10, 1997, the Company issued $250,000 of promissory notes which
accrue interest at a rate of 10% per annum. The principal sum together
with interest payable in arrears is due on January 9, 1998. In addition,
250,000 warrants to purchase shares of common stock at $0.50 per share were
issued which expire on October 9, 1999.
F-24
<PAGE>
NO DEALER, SALES REPRESENTATIVES, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION
OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Page
Prospectus Summary . . . . . . . . . . . . . . . . . . . .
Summary Financial Information. . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . .
Dividend Policy. . . . . . . . . . . . . . . . . . . . . .
Price Range of
Common Stock . . . . . . . . . . . . . . . . . . . . . .
Dilution . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalization . . . . . . . . . . . . . . . . . . . . . .
Management's Discussion and
Analysis of Results of
Operations and Financial
Condition . . . . . . . . . . . . . . . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . .
Compensation of Executive
Officers and Directors. . . . . . . . . . . . . . . . . .
Certain Relationships
and Related Transactions. . . . . . . . . . . . . . . . .
Principal Stockholders . . . . . . . . . . . . . . . . . .
Description of Securities. . . . . . . . . . . . . . . . .
Shares Eligible for Future Sale. . . . . . . . . . . . . .
Underwriting . . . . . . . . . . . . . . . . . . . . . . .
Legal Matters. . . . . . . . . . . . . . . . . . . . . . .
Experts. . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . .
UNTIL _______, 1997 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
INTERNATIONAL META
SYSTEMS, INC.
_____________ SHARES
____________
PROSPECTUS
____________
NICHOLS, SAFINA,
LERNER & COMPANY, INC.
_______________, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses in connection with the Offering
described in this Registration Statement, other than the underwriting discount,
will be as follows:
Securities and Exchange Commission Registration Fee . . . . . . . . . $
National Association of Securities Dealers, Inc. Filing Fee . . . . .
Accounting Fees and Expenses. . . . . . . . . . . . . . . . . . . . .
Registrant's Legal Fees and Expenses. . . . . . . . . . . . . . . . .
Blue Sky Fees and Expenses. . . . . . . . . . . . . . . . . . . . . .
Exchange Listing Fee . . . . . . . . . . . . . . . . . . . . . . . .
Printing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Agent Fee. . . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation generally provides for the
maximum indemnification of a corporation's officers and directors as permitted
by law in the State of Delaware. Delaware law empowers a corporation to
indemnify any person who was or is a party or who is threatened to be made a
party to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, except in the case of
an action by or in the right of the corporation, by reason of the fact that he
or she is or was a director, officer, employee or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise. Depending on the
character of the proceeding, a corporation may indemnify against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding if the person indemnified acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceedings, had no
reasonable cause to believe his or her conduct was unlawful.
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or other
enterprise, against expenses, including amounts paid in settlement and
attorney's fees actually and reasonably incurred by him or her in connection
with the defense or settlement of the action or suit if he or she acted in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the corporation. Indemnification may not be
made for any claim, issue or matter as to which such a person has been adjudged
by a court of competent jurisdiction, after exhaustion of all appeals therefrom,
to be liable to the corporation or for amounts paid in settlement to the
corporation unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
II-1
<PAGE>
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above, or in defense of any claim, issue or matter
therein, he or she must be indemnified by the corporation against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the defense. Any indemnification under this section, unless ordered by a
court or advanced pursuant to this section, must be made by the corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances. The
determination must be made: (a) by the stockholders; (b) by the board of
directors by majority vote of a quorum consisting of directors who were not
parties to the action, suit or proceeding; (c) if a majority vote of a quorum
consisting of directors who were not parties to the action, suit or proceeding
so orders, by independent legal counsel in a written opinion; or (d) if a quorum
consisting of directors who were not parties to the action, suit or proceeding
cannot be obtained, by independent legal counsel in a written opinion.
The articles of incorporation, the bylaws or an agreement made by the
corporation may provide that the expenses of officers and directors incurred in
defending a civil or criminal action, suit or proceeding must be paid by the
corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he or she is not entitled to be indemnified
by the corporation. The provisions of this section do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
The indemnification and advancement of expenses authorized in or ordered by
a court pursuant to this section: (a) does not exclude any other rights to which
a person seeking indemnification or advancement of expenses may be entitled
under the articles of incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, for either an action in
his or her official capacity or an action in another capacity while holding his
or her office, except that indemnification, unless ordered by a court pursuant
to this section or for the advancement of any director or officer if a final
adjudication establishes that his or her acts or omissions involved intentional
misconduct, fraud or a knowing violation of the law and was material to the
cause of action; and (b) continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
The Company has obtained directors' and officers' liabilities insurance
with a $1,000,000 limit of liability. Further, the Company may enter into
agreements of indemnification with its directors to provide for indemnification
to the fullest extent permitted under Delaware law.
The Underwriting Agreement, the proposed form of which is filed herewith,
contains provisions by which the Underwriters agree to indemnify the Registrant,
each person who controls the Registrant within the meaning of Section 15 of the
Securities Act of 1933, as amended (the "Securities Act"), or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), each director
of the Registrant, and each officer of the Registrant who signs this
Registration Statement with respect to information relating to such underwriter
furnished in writing by such Underwriter for use in the Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company intends to effect a reverse split of the issued and outstanding
shares of Common Stock on a 1-for-___ basis on the Effective Date of this
Registration Statement. The number of shares of Common Stock and per share
purchase prices set forth in this Item 15 give effect to such reverse stock
split.
II-2
<PAGE>
From August, 1995 to October, 1995, the Company issued 10,000 shares of
Series A Preferred Stock, at an aggregate purchase price of $980,000. From
January, 1996 to July, 1996, the Company issued 41,275 shares of Common Stock
as dividends on the Series A Preferred Stock to such persons. On June 30, 1997,
the 10,000 shares of Series A Preferred Stock were converted by their terms into
1,052,632 shares of Common Stock.
In November, 1995, the Company issued 250 shares of Series B Preferred
Stock, at an aggregate purchase price of $25,000. From July, 1996 to July,
1997, the Company issued 2,209 shares of Common Stock as dividends on the Series
B Preferred Stock to such persons.
From December, 1995 to March, 1996, the Company issued 10,000,000 shares of
Common Stock, at an aggregate purchase price of $10,000,000.
From 1995 to 1996, the Company issued an aggregate of 47,124 shares of
Common Stock, at an aggregate purchase price of $148,390 as compensation for
services rendered to the Company.
From June through August, 1997, the Company issued an aggregate of $430,000
of certain unsecured promissory notes and warrants to purchase up to 614,298
shares of Common Stock. The Company paid placement fees equal to 10% of the
gross purchase price of the notes.
In July, 1997, the Company issued $1,500,000 of promissory notes
convertible into shares of Common Stock. The Company paid placement fees equal
to 8% of the gross purchase price of the notes.
In September, 1997, the Company issued $500,000 of promissory notes
convertible into shares of Common Stock. The Company paid placement fees equal
to 8% of the gross purchase prices of the notes.
In October, 1997, the Company issued $250,000 of certain unsecured
promissory notes and warrants to purchase up to 250,000 shares of Common Stock.
Except as otherwise provided above, the Company believes each of the
foregoing issuances of securities was made to accredited investors in
transactions exempt from registration under Section 4(2) of the Securities Act.
II-3
<PAGE>
ITEM 16
EXHIBITS.
- ---------
1.1 Underwriting Agreement
1.2 Underwriters' Warrant*
1.3 Selected Dealer Agreement*
1.4 Agreement Among Underwriters*
3.1 Restated Certificate of Incorporation(1)
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
3.3 Form of Certificate of Amendment to the Restated Certificate of
Incorporation(2)
3.4 Bylaws(1)
3.5 Certificate of Rights and Preferences of Series A Convertible
Preferred Stock
3.6 Certificate of Rights and Preferences of Series B Convertible
Preferred Stock
4.1 Specimen Common Stock Certificate*
5.1 Opinion of Matthias & Berg LLP
10.1 1996 Stock Option Plan(1)
10.2 1993 Incentive Stock Option Plan(3)
10.3 1993 Non-Qualified Stock Option Plan(3)
10.4 Employment Agreement between the Company and Lee W. Hoevel
10.5 Stock Purchase Agreement between the Company and Paragon Limited
Partnership
22.1 List of subsidiaries of the Company
24.1 Consent of Singer Lewak Greenbaum & Goldstein LLP
24.2 Consent of Matthias & Berg LLP (included in Exhibit 5.1)
25.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedules
_____________________________
* To be filed by amendment.
1. Filed as part of the Company's Registration Statement on Form S-8,
dated January 24, 1997.
2. Filed as part of the Company's Proxy Statement on Schedule 14A, dated
August 6, 1997
3. Filed as part of the Company's Registration Statement on Form S-8,
dated February 11, 1994.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
At the closing of this Offering, the Company will provide certificates
evidencing the Common Stock in such denominations and registered in such names
as required by the Underwriters to permit prompt delivery to the purchasers.
The undersigned Registrant hereby undertakes it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) For the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration any of the
securities being registered that remain unsold at the end of the Offering.
In addition, the undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by 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.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of El Segundo, California on
October 28, 1997.
INTERNATIONAL META SYSTEMS, INC.
By: /s/George W. Smith
----------------------------------------
George W. Smith, Chief Executive Officer
II-6
<PAGE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George W. Smith and Lee W. Hoevel, or
either of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) and supplements to this Registration Statement, and
to file the same with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
--------- ------------------------ ----
<S> <C> <C>
/s/George W. Smith Director, Chief Executive Officer October 28, 1997
- -------------------------------- and Chief Financial Officer (acting)
George W. Smith (Principal Financial Officer
and Principal Accounting
Officer)
/s/Lee W. Hoevel Director, President and Secretary October 28, 1997
- --------------------------------
Lee W. Hoevel
/s/Martin S. Albert Chairman of the Board of Directors October 28, 1997
- --------------------------------
Martin S. Albert
/s/Frank LaChapelle Director October 28, 1997
- --------------------------------
Frank LaChapelle
/s/Philip Neches Director October 28, 1997
- --------------------------------
Philip Neches
/s/Masahiro Tsuchiya Director October 28, 1997
- --------------------------------
Masahiro Tsuchiya
/s/ Sigmund Hartmann Director October 28, 1997
- --------------------------------
Sigmund Hartmann
</TABLE>
II-7
<PAGE>
UNDERWRITING AGREEMENT
________________, 1997
Nichols, Safina, Lerner & Co., Inc.
800 Third Avenue
New York, New York 10022
Dear Sirs:
International Meta Systems, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to you, _________ shares of the common stock, $.0001 par value (the "Common
Stock") of the Company (the "Firm Shares"). In addition, solely for the purpose
of covering over-allotments, the Company proposes to grant to you the option to
purchase up to ____________ additional shares of Common Stock (the "Additional
Shares"). The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares". The Shares are more fully described
in the Registration Statement and Prospectus referred to below.
The Company confirms as follows its agreement with you:
1. REGISTRATION STATEMENT AND PROSPECTUS: The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission"), in
accordance with the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder (the "Rules and
Regulations", and together with said Act, the "Act"), a registration statement
on Form S-1 (File No. ______) and may have filed one or more amendments thereto,
including in such registration statement and in certain amendments thereto a
related preliminary prospectus for the registration under the Act of the Shares.
In addition, subject to the provisions of Section 4(e) hereof, the Company has
filed or will promptly file a further amendment to such registration statement
prior to the effectiveness of such registration statement, unless an amendment
is not required pursuant to Rule 430A of the Rules and Regulations. As used in
this Agreement, the term "Registration Statement" means such registration
statement, including the prospectus, financial statements and schedules thereto,
exhibits and other documents filed as part thereof, as amended when, and in the
form in which, it is declared effective by the Commission, and, in the event any
post-effective amendment thereto is filed thereafter and on or before the
Closing Date (as hereinafter defined), shall also mean (from and after the date
such post-effective amendment is effective under the Act) such registration
statement as so amended, provided that such Registration Statement, at the time
it becomes effective, may omit such information as is permitted to be omitted
from the Registration Statement when it becomes effective pursuant to Rule 430A
of the Rules and Regulations, which information ("Rule 430 Information") shall
be deemed to be included in such Registration Statement when a final prospectus
is filed with the Commission in accordance with Rules 430A and 424(b)(1) or (4)
of the Rules and Regulations; the term "Preliminary Prospectus" means each
prospectus included in the Registration Statement, or any amendments thereto,
before it becomes effective under the Act, the form of prospectus omitting Rule
430A Information included in the Registration Statement when it becomes
effective, if applicable (the "Rule 430A Prospectus"), and any prospectus filed
by the Company with your consent pursuant to Rule 424(a) of the Regulations; the
term "Prospec-
<PAGE>
tus" means the final prospectus included as part of the Registration Statement,
except that (i) if any prospectus (including any preliminary prospectus) which
differs from such prospectus included in the Registration Statement is provided
to you for use in connection with the offering of the Shares (whether or not
such differing prospectus is required to be filed by the Company pursuant to
Rule 424(b) under the Act), the term "Prospectus" as used herein shall mean such
differing prospectus from and after the date on which it shall have been first
used, and (ii) in the event any supplement to or amendment of such prospectus is
made after the date on which the Registration Statement is declared effective
and on or prior to the Closing Date, the term "Prospectus" shall also mean (with
respect to any supplement, from and after the date such supplement is first used
or, with respect to any amendment, the date such amendment is effective under
the Act) such prospectus as so supplemented or amended; and the term "Effective
Date" means (i) if the Company and you have determined not to proceed pursuant
to Rule 430A under the Act, the date on which the Registration Statement
becomes effective, or (ii) if the Company and you have determined to proceed
pursuant to Rule 430A under the Act, the date of this Agreement.
2. AGREEMENTS TO SELL AND PURCHASE: Subject to the terms and conditions
herein set forth, the Company agrees to sell to you and each of you agree,
severally and not jointly, to purchase from the Company, at a purchase price of
$____ per Firm Share, the number of Shares (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying the aggregate number of
Firm Shares to be sold by a fraction, the numerator of which is the aggregate
number of Firm Shares to be purchased by each of you as set forth opposite your
respective names in Schedule I hereto and the denominator of which is the
aggregate number of Firm Shares to be purchased hereunder.
Subject to the terms and conditions herein set forth, the Company agrees
to sell to you, and you shall have the right to purchase from the Company, up to
____________ Additional Shares at a purchase price of $______ per Additional
Share. Additional Shares may be purchased solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each of you, severally, agrees to
purchase from the Company that proportion (subject to such adjustments as you
may both determine to avoid fractional Additional Shares) of the number of
Additional Shares to be purchased which the number of Firm Shares set forth
opposite your name in Schedule I bears to the aggregate number of Firm Shares to
be purchased from the Company hereunder. Additional Shares may be purchased at
any time and from time to time on or before the thirtieth business day following
the date of this Agreement upon written notice from you to the Company
specifying the number of Additional Shares to be purchased.
You will offer the Shares for sale at the initial public offering price
set forth on the cover of the Prospectus. After the initial public offering,
you may from time to time increase or decrease the public offering price, in
your sole discretion, by reason of changes in general market conditions or
otherwise.
3. DELIVERY AND PAYMENT: Delivery of and payment for the Firm Shares
shall be made at the offices of Nichols, Safina, Lerner & Co., Inc. ("NSL") at
800 Third Avenue, New York, New York 10022 (or such other place as shall be
mutually agreed upon) at such time and date, not later than the third full
business day following the Effective Date (unless the time of effectiveness is
after 4:00 P.M. New York time, in which case the date of closing shall be no
later than four business days following the Effective Date), as you shall
designate by at least forty-eight hours prior notice to the Company (the
"Closing Date").
2
<PAGE>
Delivery of and payment for Additional Shares shall be made at said
offices of NSL, or at such other place, and at such time(s) and date(s) (each an
"Optional Closing Date") as may be agreed upon in writing by you and the
Company; PROVIDED, HOWEVER, that in no event may an Optional Closing Date be (i)
earlier than the Closing Date or (ii) later than three business days after the
date on which the related notice to purchase Additional Shares is given.
The Closing Date and the time and place of delivery of and payment for
the Shares may be varied by agreement between you and the Company. The Optional
Closing Date and the time and place of delivery of and payment for the
Additional Shares may be varied by agreement between you and the Company.
Delivery of certificates for the Shares (in definitive form, registered in such
names and in such denominations as you shall request at least two business days
prior to the Closing Date by written notice to the Company) shall be made to you
against payment of the purchase price therefor by certified or official bank
check or checks payable in New York Clearing House funds to the order of the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at the offices of NSL at least 24 hours prior to the
Closing Date and each Optional Closing Date, as the case may be.
On the Closing Date, at the time of the delivery and payment for the Firm
Shares, (i) the Company shall pay to you as a non-accountable expense allowance
a sum equal to $___ per Share for each Firm Share purchased by you hereunder (or
an aggregate of $_______ in respect of the Firm Shares), less the $______
heretofore paid to you in respect thereof, by certified or official bank check
or checks payable in New York Clearing House funds payable to the order of, and
in accordance with instructions from, you and (ii) the Company shall issue, sell
and deliver to you, for an aggregate purchase price of $10, a warrant to
purchase up to an aggregate of _______ Shares (the "Underwriters' Warrant") in
substantially in the form filed as an exhibit to the Registration Statement.
The shares of Common Stock issuable upon exercise of the Underwriters' Warrant
are hereinafter referred to collectively as the "Underwriters' Warrant Shares".
The Underwriters' Warrant will be exercisable at an initial exercise price of
$_______ per Share at any time and from time to time, in whole or in part,
during a four-year period commencing one year following the Effective Date. The
Company has granted you certain registration rights with respect to the
Underwriters' Warrant and the securities issuable upon exercise thereof, as set
forth in said Underwriters' Warrant.
On each Additional Closing Date, at the time of the delivery and payment
for the Additional Shares, the Company shall pay to you as a non-accountable
expense allowance, a sum equal to $___ per Additional Share for each Additional
Share purchased by you on such date by certified or official bank check or
checks payable in New York Clearing House funds payable to the order of, and in
accordance with instructions from, you.
4. COVENANTS AND AGREEMENTS OF THE COMPANY: (A) The Company covenants
and agrees with you as follows:
(a) The Company will notify you promptly by telephone and (if requested by
you) will confirm such advice in writing, (1) when the Registration
Statement has become effective and when any post-effective amendment
thereto becomes effective, (2) if Rule 430A under the Act is used, or the
Prospectus is otherwise required to be filed with the Commission pursuant
to Rule 424(b) under the Act, when the Prospectus is filed with the
Commission pursuant to Rule 424(b) under the Act, (3) of any request by
the Commission for amendments or supplements to the Registration
3
<PAGE>
Statement or the Prospectus or for additional information, (4) of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement, preventing or suspending the use of the
Preliminary Prospectus, the Prospectus, the Registration Statement or any
amendment or supplement thereto, or refusing to permit the effectiveness
of the Registration Statement ("Stop Order"), or the initiation of any
proceedings for any of those purposes, (5) of the happening of any event
during the period mentioned in paragraph (f) below which in the
reasonable judgment of the Company makes any statement made in the
Registration Statement or the Prospectus untrue or which requires the
making of any changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading, and (6) of the
receipt of any comments from the Commission or the Blue Sky or securities
authorities of any jurisdiction regarding the Registration Statement, any
post-effective amendment thereto, the Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto. The Company will use
its best efforts to prevent the issuance of any Stop Order by the
Commission or any notification from the Blue Sky or securities
authorities of any jurisdiction suspending the qualification or
registration of the Shares for sale in such jurisdictions, and if at any
time the Commission shall issue any Stop Order, or if the Blue Sky or
securities authorities of any jurisdiction shall issue notification
suspending the qualification or registration of the Shares, the Company
will make every reasonable effort to obtain the withdrawal of such Stop
Order or notification at the earliest possible moment. The Company will
promptly advise you of its receipt of any notification with respect to
the suspension of the qualification or registration of the Shares for
offer or sale in any jurisdiction or the initiation or threatening of any
action or proceeding for such purpose.
(b) Prior to any public offering of the Shares by you, the Company will
cooperate with you and your counsel in registering or qualifying the
Shares for offer or sale under the Blue Sky or securities laws, rules or
regulations of such jurisdictions as you may reasonably request; provided
that in no event shall the Company be obligated to register or qualify to
do business as a foreign corporation in any jurisdiction where it is not
now so registered or qualified or to take any action which would subject
it to general service of process, or to taxation as a foreign corporation
doing business, in any jurisdiction where it is not now so subject. The
Company will pay all fees and expenses relating to the registration or
qualification of the Shares under such Blue Sky or securities laws of
such jurisdictions as you may designate (including the legal fees,
expenses and disbursements of counsel to you for the registration or
qualification of the Shares in such jurisdictions as you shall
determine). After registration, qualification or exemption of the Shares
for offer and sale in such jurisdictions, and for as long as any offering
pursuant to this Agreement continues, the Company, at your reasonable
request, will file and make such statements or reports, and pay the fees
applicable thereto, at such times as are or may be required by the laws,
rules or regulations of such jurisdictions in order to maintain and
continue in full force and effect the registration, qualification or
exemption for offer or sale of the Shares in such jurisdictions. After
the termination of the offering contemplated hereby, and as long as any
of the Shares are outstanding, the Company will file and make, and pay
all fees applicable thereto, such statements and reports and renewals of
registration as are or may be required by the laws, rules or regulations
of such jurisdictions to maintain and continue in full force and effect
the registration, qualification or exemption for secondary market
transactions in the Shares, in the various jurisdictions in which the
Shares were originally registered, qualified or exempted for offer or
sale.
4
<PAGE>
(c) The Company will furnish to you, without charge, four manually-signed
copies of the Registration Statement as originally filed on Form SB-2 and
of any amendments (including post-effective amendments thereto),
including financial statements and schedules, if any, and all consents,
certificates and exhibits (including those incorporated therein by
reference to the extent not previously furnished to you), heretofore or
hereafter made, signed by or on behalf of its officers whose signatures
are required thereon and a majority of its board of directors.
(d) The Company will use its best efforts to cause the Registration Statement
to become effective under the Act. Upon such effectiveness, if the
Company and you have determined not to proceed pursuant to Rule 430A
under the Act, the Company will timely file a Prospectus pursuant to, and
in conformity with, Rule 424(b), if required, and if the Company and you
have determined to proceed pursuant to Rule 430A under the Act, the
Company will timely file a Prospectus pursuant to, and in conformity
with, Rules 424(b) and 430A under the Act.
(e) The Company will give you and your counsel advance notice of its
intention to file any amendment to the Registration Statement or any
amendment or supplement to the Prospectus, whether before or after the
effective date of the Registration Statement, and will not file any such
amendment or supplement unless the Company shall have first delivered
copies of such amendment or supplement to you and your counsel and you
and your counsel shall have given your consent to the filing of such
amendment or supplement. Any such amendment or supplement shall comply
with the Act.
(f) From and after the Effective Date, the Company will deliver to you,
without charge, as many copies of the Prospectus or any amendment or
supplement thereto as you may reasonably request. The Company consents
to the use of the Prospectus or any amendment or supplement thereto by
you and by all dealers to whom the Shares may be sold, both in connection
with the offering or sale of the Shares and for such period of time
thereafter as the Prospectus is required by law to be delivered in
connection therewith. If during such period of time any event shall
occur which in the judgment of you or your counsel should be set forth in
the Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is
necessary to supplement or amend the Prospectus to comply with law, the
Company will forthwith prepare and duly file with the Commission an
appropriate supplement or amendment thereto, and will deliver to each of
you, without charge, such number of copies thereof as you may reasonably
request.
(g) The Company will promptly pay all expenses in connection with (1) the
preparation, printing, filing, distribution and mailing (including,
without limitation, express delivery service) of the Registration
Statement, each preliminary prospectus, the Prospectus, and the
preliminary and final forms of Blue Sky memoranda (if any); (2) the
issuance and delivery of the Shares; (3) the fees and expenses of legal
counsel and independent accountants for the Company relating to, among
other things, opinions of counsel, audits, review of unaudited financial
statements and cold comfort review; (4) the fees and expenses of a
registrar or transfer agent for the Common Stock; (5) the printing,
filing, distribution and mailing (including, without limitation, express
delivery service) of this Agreement, the Agreement Among Underwriters, if
any, and the Selected Dealers Agreement; (6) furnishing such copies of
the Registration Statement, the Prospectus and any preliminary
prospectus, and all amendments and supplements thereto, as may be
requested for use in connection with the offering and sale of the Shares
by you or by dealers to whom Shares
5
<PAGE>
may be sold; (7) any fees and communication expenses with respect to
filings required to be made by you with the National Association of
Securities Dealers Regulatory, Inc. (the "NASDR"); and (8) the quotation
of the Shares on NASDR's Automated Quotation System ("NASDAQ").
(h) On the Closing Date, the Company shall sell to you, the Underwriters'
Warrant to purchase _______ Shares for an aggregate purchase price of
$10.
(i) If this Agreement shall be terminated pursuant to any of the provisions
hereof (otherwise than by notice given by you pursuant to Section 8
hereof) or if for any reason the Company shall be unable to perform its
obligations hereunder, the Company will reimburse you for all of your
out-of-pocket expenses (including the fees and expenses of your counsel)
reasonably incurred by you in connection herewith; PROVIDED, HOWEVER, the
Company shall not be so obligated to reimburse you if this Agreement is
terminated by reason of a failure to satisfy the condition set forth in
Section 7(k) hereinbelow by reason of your unwillingness to modify the
underwriting arrangements pertaining to sale of the Shares and/or the
participation by you in the sale of the Shares, as may be requested by
the NASDR.
(j) For a period of ninety (90) days after the commencement of the public
offering of the Shares by you, without your prior written consent, the
Company will not offer, issue, sell, contract to sell, grant any option
for the sale of, or otherwise dispose of, directly or indirectly, any
securities of the Company, except as provided for and as contemplated by
this Agreement, as specifically disclosed in the Registration Statement
respecting certain post-offering issuances to Company employees, or for
stock options granted to employees pursuant to the Company's Stock Option
Plan attached as an exhibit to the Registration Statement.
(k) On or prior to the Closing Date, the Company shall obtain from each of
its officers and directors, his or her enforceable written agreement, in
form and substance satisfactory to your counsel, that for a period of
twenty-four (24) months after the Effective Date (or any longer period
required by any jurisdiction in which the offer and sale of the Shares is
to be registered or qualified), he or she will not offer for sale, sell,
contract to sell, assign, pledge, transfer, grant any option for the sale
of, or otherwise dispose of, directly or indirectly, any securities of
the Company (including without limitation any shares of Common Stock),
owned by him or her as of the Closing Date, whether upon exercise of
warrants, stock options or otherwise, without Nichols, Safina, Lerner &
Co., Inc.'s prior written consent (the "Lock-up Letter").
(l) The Company has reserved and shall continue to reserve and keep available
the maximum number of shares of its authorized but unissued Common Stock
and other securities for issuance upon exercise of the Underwriters'
Warrant.
(m) For a period of five years after the date of this Agreement, the Company
shall:
(1) retain Singer Lewak Greenbaum & Goldstein LLP or another
nationally recognized firm of independent public accountants, as
its auditors, and at its own expense, shall cause such independent
certified public accountants to review the Company's financial
statements for each of the first three fiscal quarters of each
fiscal year prior to the announcement of quarterly financial
information, the filing of the Company's 10-Q quarterly reports
and the mailing of quarterly financial information to its
shareholders;
6
<PAGE>
(2) cause the Company's Board of Directors to meet not less frequently
than quarterly, upon proper notice, and cause an agenda and
minutes of the preceding meeting to be distributed to directors
prior to each such meeting;
(3) distribute to its security holders, within 120 days after the end
of each fiscal year, an annual report (containing certified
financial statements of the Company) prepared in accordance with
those required under Rule 14a-3(b) of Regulation 14A promulgated
by the Commission under the Securities Exchange Act of 1934, as
amended; and
(4) appoint a transfer agent for the Common Stock, in each case
acceptable to you.
(n) For a period of five years after the date of this Agreement, the Company
shall furnish you, free of charge, with the following:
(1) within 90 days after the end of each fiscal year, financial
statements for the Company certified by the independent certified
public accountants referred to in Section 4(m)(1) above, including
a balance sheet, statement of operations, statement of
shareholders' equity and statement of cash flows, for the Company,
with supporting schedules, prepared in accordance with generally
accepted accounting principles, as at the end of such fiscal year
and for the twelve months then ended, accompanied by a copy of the
certificate or report thereon of such independent certified public
accountants;
(2) (x) for so long as the Company is a reporting company under any of
Sections 12(b), 12(g) or 15(d) of the Securities Exchange Act, as
amended, and the rules and regulations of the Commission
promulgated thereunder (collectively, the "Exchange Act"),
promptly after filing with the Commission, copies of all reports
and proxy soliciting material which the Company is required to
file under the Exchange Act, or (y) at such times as the Company
is not a reporting company under the aforesaid provisions of the
Exchange Act, as soon as practicable after the end of each of the
first three fiscal quarters of each fiscal year, financial
statements of the Company, including a balance sheet, statement of
operations, statement of shareholders' equity and statement of
cash flows as at the end of, or for each such fiscal quarter and
the comparable period of the preceding year, which statements need
not be audited;
(3) as soon as practicable after they have first been distributed to
shareholders of the Company, copies of each annual and interim
financial or other report or communication sent by the Company to
its shareholders (except to the extent duplicative of information
furnished pursuant to any other clause of this Section 4(n));
(4) as soon as practicable following release or other dissemination,
copies of every press release and every material news item and
article in respect of the Company or its affairs released or
otherwise disseminated by the Company;
(5) promptly following receipt thereof, copies of the Company's daily
transfer sheets prepared by the Company's transfer agent and a
list of shareholders; and
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(6) such additional documents and information with respect to the
Company and its affairs, if any, as you may from time to time
reasonably request.
(o) On or prior to the Effective Date, the Company will have accomplished the
quotation of the Shares on the NASDAQ National Market, subject only to
notice of issuance and the registration of such securities under the
Exchange Act. For a period of five years from the date of this
Agreement, the Company agrees, at its sole cost and expense, to take all
necessary and appropriate action such that its securities continue to be
quoted on NASDAQ, provided that the Company otherwise complies with the
prevailing requirements of NASDAQ.
(p) For a period of two years after the date of this Agreement, the Company
will not seek to amend its certificate of incorporation to authorize the
issuance of any other class of its capital stock, including, without
limitation, any preferred stock, without your prior written consent.
(q) The Company agrees, at its own cost and expense, to deliver to you and
your counsel, within a reasonable period after the Optional Closing Date,
or the expiration of the period in which you may exercise the
over-allotment option, five bound volumes containing copies of all
documents and correspondence filed with, or received from, the Commission
and the NASDR relating to the offering of the Shares and the closing
thereof, including related matters.
(r) The Company will make generally available to its security holders and
deliver to you as soon as it is practicable to do so (but in no event
later than the 45th day after the end of the twelve-month period
beginning at end of fiscal quarter of the Company during which the
Registration Statement becomes effective, or, if the Registration
Statement becomes effective during the Company's last fiscal quarter, the
90th day after the end of such twelve-month period), an earnings
statement of the Company (which need not be audited) covering a period of
at least twelve consecutive months commencing after the effective date of
the Registration Statement, which shall satisfy the requirements of
Section 11(a) of the Act.
(s) The Company will, promptly upon your request, prepare and file with the
Commission any amendments or supplements to the Registration Statement,
any Preliminary Prospectus or the Prospectus and take any other action,
which in the reasonable opinion of Lehman & Eilen, counsel to you, may be
reasonably necessary or advisable in connection with the distribution of
the Shares, and will cause the same to become effective as promptly as
possible.
(t) The Company will furnish to you as early as practicable prior to the
Closing Date and any Optional Closing Date, as the case may be, but no
less than two full business days prior thereto, a copy of the latest
available unaudited interim financial statements of the Company which
have been reviewed by the Company's independent certified public
accountants, as stated in their letters to be furnished pursuant to
Section 7(d) hereof.
(u) The Company will apply the net proceeds from the issuance and sale of the
Shares for the purposes and in the manner set forth under the caption
"Use of Proceeds" in the Prospectus, and will file on a timely basis such
reports with the Commission with respect to the sale of the Shares and
the application of the proceeds therefrom as may be required pursuant to
Rule 463 under the Act. The Company will operate its business in such a
manner and, pending application of the net proceeds of the offering for
the purposes and in the manner set forth under the caption "Use
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of Proceeds" in the Prospectus, will invest such net proceeds in certain
types of securities so as not to become an "investment company" as such
term is defined under the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(v) The Company has filed a registration statement on Form 8-A covering the
Shares pursuant to Section 12(b) of the Exchange Act and will use its
best efforts to cause said registration statement to become effective on
the Effective Date. The Company will comply with all registration,
filing and reporting requirements of the Exchange Act, which may from
time to time be applicable to the Company. The Company shall comply with
the provisions of all undertakings contained in the Registration
Statement.
(w) Prior to the Closing Date or any Optional Closing Date, as the case may
be, the Company shall neither issue any press release or other
communication, directly or indirectly, nor hold any press conference with
respect to the offering of the Shares, the Company or its business,
results of operations, condition (financial or otherwise), property,
assets, liabilities or prospects of the Company, without your prior
written consent.
(x) For a period of ninety (90) days after the date hereof, the Company will
not, directly or indirectly, take any action designed, or which will
constitute or which might reasonably be expected to cause or result in,
stabilization or manipulation of the market price of the Shares, or the
facilitation of the sale or resale of the Shares.
(y) The Company maintains a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles
and to maintain asset accountability; (iii) access to cash and cash
equivalents is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for cash and
cash equivalents is compared with the existing cash and cash equivalents
at reasonable intervals and appropriate action is taken with respect to
any differences.
(z) There are no business relationships or related party transactions of the
nature described in Item 404 of Regulation S-B of the Rules and
Regulations involving the Company and any person referred to in Items 401
or 404, except as required to be described in the Prospectus and as so
described.
(aa) The Company will not grant any person or entity registration rights with
respect to any of its securities, except such rights as are subordinate
to the registration rights contained in the Underwriters' Warrant and are
exercisable no earlier than six months after the securities to be
registered upon exercise of such registration rights have been offered
for sale pursuant to an effective registration statement under the Act
and registered or qualified for sale under the Blue Sky or state
securities law, rules or regulations of the jurisdictions in which such
securities are to be offered for sale.
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5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY: (A) The Company
represents and warrants to you that:
(a) When the Registration Statement becomes effective, and at all times
subsequent thereto to and including the Closing Date and each Optional
Closing Date, and during such longer period as the Prospectus may be
required to be delivered in connection with sales by you or any dealer,
and during such longer period until any post-effective amendment thereto
shall become effective, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment or supplement to the Registration Statement or the Prospectus)
will contain all statements which are required to be stated therein in
accordance with the Act, will comply with the Act, and will not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, and no event will have occurred which should have
been set forth in an amendment or supplement to the Registration
Statement or the Prospectus which has not then been set forth in such an
amendment or supplement; if a Rule 430A Prospectus is included in the
Registration Statement at the time it becomes effective, the Prospectus
filed pursuant to Rules 430A and 424(b) (1) or (4) will contain all Rule
430A Information and all statements which are required to be stated
therein in accordance with the Act, will comply with the Act, and will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and each Preliminary Prospectus, as of
the date filed with the Commission, did not include any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; except that
no representation or warranty is made in this Section 5(A)(a) with
respect to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company as stated in
Section 6(b) with respect to you expressly for inclusion in any
Preliminary Prospectus, the Registration Statement, or the Prospectus, or
any amendment or supplement thereto.
(b) Neither the Commission nor the Blue Sky or securities authorities of any
jurisdiction has issued an order suspending the effectiveness of the
Registration Statement, preventing or suspending the use of any
Preliminary Prospectus, the Prospectus, the Registration Statement, or
any amendment or supplement thereto, refusing to permit the effectiveness
of the Registration Statement, or suspending the registration or
qualification of the Shares, nor has the Commission or any of such
authorities instituted or threatened to institute any proceedings with
respect to such an order.
(c) The Company is a corporation duly incorporated and validly existing in
good standing under the laws of Delaware, its jurisdiction of
incorporation. The Company has full corporate power and authority and
has obtained all necessary consents, authorizations, approvals, orders,
licenses, certificates, declarations and permits of and from, and have
made all required filings with, all federal, state, local and other
governmental authorities and all courts and other tribunals, to own,
lease, license and use its properties and assets and to carry on its
business in the manner described in the Prospectus. All such consents,
authorizations, approvals, orders, licenses, certificates, declarations,
permits and filings are in full force and effect and the Company is in
all material respects complying therewith. The Company is duly
registered or qualified to do business as a foreign corporation and is in
good standing in each other jurisdiction in which their
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ownership, leasing, licensing, or use of property and assets or the
conduct of its business requires such registration or qualification.
(d) The authorized capital stock of the Company consists of 70,000,000 shares
of Common Stock, of which _________ shares are outstanding, and 1,000,000
shares of Preferred Stock, $.0001 par value, of which no shares are
outstanding. The Company does not have any subsidiaries or own any
capital stock or equity interest in any other corporation, partnership,
limited liability company or other entity. Each outstanding share of
Common Stock, are validly authorized, validly issued, fully paid, and
nonassessable, without any personal liability attaching to the ownership
thereof, and has not been issued and is not owned or held in violation of
any preemptive rights of shareholders. There is no commitment, plan or
arrangement to issue, and no outstanding option, warrant or other right
calling for the issuance of, any share of capital stock of the Company or
any security or other instrument which by its terms is convertible into,
exercisable for, or exchangeable for capital stock of the Company, except
as disclosed in the Prospectus. There is outstanding no security or
other instrument which by its terms is convertible into or exchangeable
for capital stock of the Company.
(e) The financial statements of the Company included in the Registration
Statement and the Prospectus fairly present the financial position, the
results of operations and the other information purported to be shown
therein at the respective dates and for the respective periods to which
they apply. Such financial statements have been prepared in accordance
with generally accepted accounting principles and are prepared in
accordance with the books and records of the Company. The accountants
whose reports on the audited financial statements are filed with the
Commission as a part of the Registration Statement are, and during the
periods covered by their report(s) included in the Registration Statement
and the Prospectus were, independent certified public accountants with
respect to the Company within the meaning of the Act. No other financial
statements are required by Form S-1 or otherwise to be included in the
Registration Statement or the Prospectus. Except as disclosed in the
Prospectus, there has at no time been a material adverse change in the
condition (financial or otherwise), results of operations, business,
property, assets, liabilities or prospects of the Company from the latest
information set forth in the Registration Statement or the Prospectus.
(f) There is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending, threatened, or
in prospect (or any basis therefor known to the Company) with respect to
or affecting the Company, its operation, business, property or assets,
except as disclosed in the Prospectus or such as individually or in the
aggregate do not now have and are not expected to have a material adverse
effect upon the operations, businesses, property, assets, condition
(financial or otherwise) or prospects of the Company. The Company is not
in violation of, or in default with respect to, any law, rule,
regulation, order, judgment, or decree, except as disclosed in the
Prospectus or such as individually or in the aggregate do not now have
and are not expected to have a material adverse effect upon the
operations, businesses, property, assets, condition (financial or
otherwise) or prospects of the Company; nor is the Company required to
take any action in order to avoid any such violation or default.
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(g) The Company has good and marketable title in fee simple absolute to all
real properties and good title to all other properties and assets which
the Prospectus indicates are owned by them, free and clear of all liens,
security interests, pledges, charges, mortgages and other encumbrances
(except as may be required to be disclosed in the Prospectus). The
properties held under lease by the Company are held by it under valid and
enforceable leases and the interests of the Company in such leases are
free and clear of all liens, encumbrances and defects, except as
disclosed in the Prospectus, and the Company is in full compliance with
all material terms and conditions thereunder and such leases are in full
force and effect. No real property owned, leased, licensed or used by
the Company is situated in an area which is, or to the knowledge of the
Company, will be, subject to zoning, use, or building code restrictions
which would prohibit (and no state of facts relating to the actions or
inaction of another person or entity or his or its ownership, leasing,
licensing, or use of any real or personal property exists or will exist
which would prevent) the continued effective ownership, leasing,
licensing, or use of such real property in the business of the Company as
presently conducted or as the Prospectus indicates any of them
contemplate conducting, except as disclosed in the Prospectus).
(h) Neither the Company nor any other party is now or is expected by the
Company to be in violation or breach of, or in default with respect to
complying with, any material provision of any indenture, mortgage, deed
of trust, debenture, note or other evidence of indebtedness, contract,
agreement, instrument, lease or license, or arrangement or understanding
which is material to the Company, and each such indenture, mortgage, deed
of trust, debenture, note or other evidence of indebtedness, contract,
agreement, instrument, lease or license is in full force and is the
legal, valid and binding obligation of the Company, and to the knowledge
of the Company, of the other contracting party and is enforceable as to
them in accordance with its terms. The Company enjoys peaceful and
undisturbed possession under all leases and licenses under which they are
operating. The Company is not a party to or bound by any contract,
agreement, instrument, lease, license, arrangement or understanding, or
subject to any charter or other restriction, which has had or is expected
in the future to have a material adverse effect on the condition
(financial or otherwise), results of operations, businesses, property,
assets or liabilities of the Company. The Company is not in violation or
breach of, or in default with respect to, any term of its Certificate of
Incorporation or By-laws.
(i) The Company does not own or have any licensed rights to, in or under any
patents, patent applications, trademarks, servicemarks, trademark or
servicemark applications, trade names, service marks, copyrights,
technology, know-how or other intangible properties or assets (all of the
foregoing being herein called "Intangibles") that are material to the
business of the Company. There is no right under any Intangibles of the
Company necessary to the business of the Company as presently conducted
or as proposed to be conducted as indicated in the Prospectus, except as
may be disclosed in the Prospectus. The Company have not received notice
of infringement with respect to asserted Intangibles of others. To the
knowledge of the Company, there is no infringement by others of
Intangibles of the Company. To the knowledge of the Company, there is no
Intangible of others which has had or may in the future have a materially
adverse effect on the condition (financial or otherwise), results of
operations, businesses, property, assets, liabilities or prospects of the
Company.
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(j) Neither the Company, any director or officer of the Company, or to the
best knowledge of the Company, any agent, employee, or other person
authorized to act on behalf of the Company have, directly or indirectly:
used any corporate funds of the Company for unlawful contributions,
gifts, entertainment, or other unlawful expenses relating to political
activity; made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political parties or
campaigns from corporate funds of the Company; violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended, as relates to the
business of the Company; or made any bribe, rebate, payoff, influence
payment, kickback, or other unlawful payment in connection with the
business of the Company.
(k) Any contract, agreement, instrument, lease or license required to be
described in the Registration Statement or the Prospectus has been
properly described therein. Any contract, agreement, instrument, lease
or license required to be filed as an exhibit to the Registration
Statement has been filed with the Commission as an exhibit to or has been
incorporated as an exhibit by reference into the Registration Statement.
(l) The Company has all requisite corporate power and authority to execute,
deliver and perform under the terms and conditions of this Agreement and
the Underwriters' Warrant. All necessary corporate proceedings of the
Company have been duly taken to authorize the execution, delivery and
performance by the Company of this Agreement and the Underwriters'
Warrant. This Agreement has been duly authorized, executed and delivered
by the Company, is a legal, valid, and binding agreement of the Company,
and is enforceable as to the Company in accordance with its terms. The
Underwriters' Warrant has been duly authorized by the Company and, when
executed and delivered by the Company, assuming the due execution and
delivery thereof by the other parties thereto, will be a legal, valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms. No consent, authorization, approval, order,
license, certificate, declaration or permit of or from, or filing with,
any governmental or regulatory authority, agent, board or other body is
required for the issue and sale of the Shares by the Company and the
execution, delivery or performance by the Company of this Agreement or
the Underwriters' Warrant (except filings with and orders of the
Commission pursuant to the Act which have been or will be made or
obtained prior to the Closing Date, and such filings, consents or permits
as are required under Blue Sky or securities laws in connection with the
transactions contemplated by this Agreement). No consent of any party to
any contract, agreement, instrument, lease, license, arrangement or
understanding to which the Company is a party, or to which any of their
properties or assets are subject, is required for the execution, delivery
or performance of this Agreement or the Underwriters' Warrant; and the
execution, delivery and performance of this Agreement and the
Underwriters' Warrant will not violate, result in a breach of, conflict
with, or (with or without the giving of notice or the passage of time or
both) entitle any party to terminate or call a default under any such
contract, agreement, instrument, lease, license, arrangement or
understanding, result in the creation or imposition of, any lien,
security interest, pledge, charge, or other encumbrance upon any of the
property or assets of the Company pursuant to the terms of any indenture,
mortgage, deed of trust, loan or credit agreement, lease or other
agreement or instrument to which the Company is a party or by which the
Company is bound or to which any of the property or assets of the Company
is subject or violate or result in a breach of any term of the
Certificate of Incorporation or By-laws of the Company, or violate,
result in a breach of, or conflict with any law, rule, regulation, order,
judgment or
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decree binding on the Company or to which its operations, business,
properties or assets are subject.
(m) The Shares are validly authorized, and when issued, paid for and
delivered in accordance with this Agreement, will be validly issued,
fully paid, and nonassessable, without any personal liability attaching
to the ownership thereof, and will not be issued in violation of any
preemptive rights of shareholders. You will receive good title to the
Shares and the Underwriters' Warrant purchased by it, upon payment of the
purchase price therefor in accordance with the provisions of this
Agreement, free and clear of all liens, security interests, pledges,
charges, encumbrances, shareholders' agreements and voting trusts
(collectively, "Encumbrances").
(n) The Underwriters' Warrant Shares are validly authorized and reserved for
issuance and, when issued, paid for and delivered upon exercise of the
Underwriters' Warrant, in accordance with the provisions of the
Underwriters' Warrant will be validly issued, fully paid and
non-assessable and will not be issued in violation of any preemptive
rights of shareholders; and the holders of the Underwriters' Warrant
Shares will receive good title to them, free and clear of all
Encumbrances.
(o) The Shares and the Underwriters' Warrant conform to all statements
relating thereto contained in the Registration Statement and the
Prospectus.
(p) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, and except as otherwise may be
stated therein, (i) the Company has not entered into any transaction or
incurred any liability or obligation, contingent or otherwise, which is
material to the Company, except in the ordinary course of business, (ii)
there has not been any change in the outstanding capital stock of the
Company, or any issuance of options, warrants or rights to purchase the
capital stock of the Company, or any material increase in the long-term
debt of the Company, or any material adverse change in the business,
condition (financial or otherwise) or results of operations of the
Company, (iii) no loss or damage (whether or not insured) to the
properties of the Company has been sustained which is material to the
Company, (iv) the Company has not paid or declared any dividend or other
distribution with respect to its stock, and (v) there has not been any
change, contingent or otherwise, in the direct or indirect control of the
Company nor, to the best knowledge of the Company, do there exist any
circumstances which would likely result in such a change.
(q) Neither the Company nor any officers or directors of the Company or
Affiliates (as defined in Rule 405 of the Rules and Regulations), have
taken or will take, directly or indirectly, prior to the termination of
the offering contemplated by this Agreement, any action designed to
stabilize or manipulate the price of any security of the Company, or
which has caused or resulted in, or which might in the future reasonably
be expected to cause or result in, stabilization or manipulation of the
price of any security of the Company, to facilitate the sale or resale of
any of the Shares.
(r) The Company has not incurred, directly or indirectly, any liability for a
fee, commission or other compensation on account of the employment of a
broker or finder in connection with the offering of the Shares
contemplated by this Agreement, except as contemplated by this Agreement
or as disclosed in the Registration Statement.
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(s) The Company is not, and does not intend to conduct its business in a
manner in which it would become, an "investment company" as defined in
Section 3(a) of the Investment Company Act.
(t) The Company has obtained, or prior to the Closing Date will obtain a
Lock-up Letter, from each of its officers and directors who owns shares
of Common Stock.
(u) No person or entity has the right to require registration of shares of
Common Stock or other securities of the Company because of the filing or
effectiveness of the Registration Statement.
(v) The Company has adequately insured its properties against loss or damage
by fire, maintain adequate insurance against liability for negligence and
maintain such other insurance as is usually maintained by companies
engaged in the same or similar businesses, including product liability
insurance.
(w) The Company has filed all federal, state and local tax returns required
to be filed (or have obtained extensions therefor) and have paid all
taxes shown on such returns and all assessments received by it to the
extent that payment has become due. The Company and its subsidiaries
have made adequate accruals for all taxes which may be owed by it but has
not been paid.
(y) Singer Lewak Greenbaum & Goldstein LLP who have certified certain
financial statements of the Company are independent public accountants as
required by the Act and the rules and regulations of the Commission
thereunder.
6. INDEMNIFICATION AND CONTRIBUTION:
(a) The Company agrees to indemnify and hold harmless you, your
officers, directors, partners, employees, agents and counsel, and each
person, if any, who controls you within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, against any and all loss, liability,
claim, damage, and expense whatsoever (which shall include, for all purposes
of this Section 6, but not be limited to, attorneys' fees and any and all
expense whatsoever incurred in investigating, preparing, or defending against
any litigation, commenced or threatened, or any claim whatsoever and any and
all amounts paid in settlement of any claim or litigation) as and when
incurred arising out of, based upon, or in connection with (i) any untrue
statement or alleged untrue statement of a material fact contained (1) in any
Preliminary Prospectus, the Rule 430A Prospectus, the Registration Statement,
or the Prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or (2) in any application or other document
or communication (in this Section 6 collectively called an "application")
executed by or on behalf of the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order
to qualify the Shares under the Blue Sky or securities laws thereof (or the
rules and regulations promulgated thereunder) or filed with the Commission or
any securities exchange or automated quotation system; or any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, unless such
statement or omission was made in reliance upon and in conformity with
written information furnished to the Company as stated in Section 6(b) by you
for inclusion in any Preliminary Prospectus, the Rule 430A Prospectus, the
Registration Statement, of the Prospectus, or any amendment or supplement
thereto, or in any application, as the case may be, or (ii) any breach of any
representation, warranty, covenant or agreement of the Company contained in
this Agreement. The foregoing agreement to indemnify shall
15
<PAGE>
be in addition to any liability the Company may otherwise have, including
liabilities arising under this Agreement.
If any action is brought against you or any of your officers, directors,
partners, employees, agents or counsel, or any of your controlling persons
(each, an "indemnified party") in respect of which indemnity may be sought
against the Company pursuant to the foregoing paragraph, such indemnified party
or parties shall promptly notify the Company in writing of the institution of
such action (but the failure so to notify shall not relieve the Company from any
liability it may have pursuant to this Section 6(a)) and the Company shall
promptly assume the defense of such action, including the employment of counsel
(satisfactory to such indemnified party or parties) and payment of expenses.
Such indemnified party or parties shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of such indemnified party or parties, unless the employment of
such counsel shall have been authorized in writing by the Company in connection
with the defense of such action or the Company shall not have promptly employed
counsel satisfactory to such indemnified party or parties to have charge of the
defense of such action or such indemnified party or parties shall have
reasonably concluded that there may be one or more legal defenses available to
it or them or to other indemnified parties which are different from or
additional to those available to the Company, in any of which events such fees
and expenses shall be borne by the Company and the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties. Anything in this paragraph to the contrary notwithstanding, the
Company shall not be liable for any settlement of any such claim or action
effected without its written consent. The Company agrees promptly to notify you
of the commencement of any litigation or proceedings against the Company or any
of its officers or directors in connection with the sale of the Shares, any
Preliminary Prospectus, the Rule 430A Prospectus, the Registration Statement, or
the Prospectus, or any amendment or supplement thereto, or any application.
(b) You agree to indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who shall have signed
the Registration Statement, and each other person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company
to you in Section 6(a), but only with respect to statements or omissions, if
any, made in any Preliminary Prospectus, the Rule 430A Prospectus, the
Registration Statement, or the Prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or in any application,
in reliance upon and in conformity with written information furnished to the
Company by you expressly for inclusion in any Preliminary Prospectus, the
Rule 430A Prospectus, the Registration Statement, or the Prospectus, or any
amendment or supplement thereto, or in any application, as the case may be.
For all purposes of this Agreement, the public offering price, the amounts of
the selling concession and reallowance set forth in the Prospectus and the
information in the third paragraph under "Underwriting" constitute the only
information furnished in writing by or on your behalf expressly for inclusion
in any Preliminary Prospectus, the Rule 430A Prospectus, the Registration
Statement or the Prospectus (as from time to time amended or supplemented),
or any amendment or supplement thereto, or in any application, as the case
may be. If any action shall be brought against the Company or any other
person so indemnified based upon any Preliminary Prospectus, the Rule 430A
Prospectus, the Registration Statement, or the Prospectus, or any amendment
or supplement thereto, or any application, and in respect of which indemnity
may be sought against you pursuant to this Section 6(c), you shall have the
rights and duties given to the Company, and the Company and each other person
so indemnified shall have the rights and duties given to the indemnified
parties, by the provisions of Section 6(a).
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(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 6(a), or
6(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act, or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed the Registration
Statement, and any controlling person of the Company), as one entity, and you,
as a second entity, shall contribute to the losses, liabilities, claims, damages
and expenses whatsoever to which any of them may be subject, so that you are
responsible for the proportion thereof equal to the percentage which the
aggregate underwriting discount set forth on the cover page of the Prospectus
represents of the initial public offering price of the Shares set forth on the
cover page of the Prospectus and the Company shall be responsible for the
remaining portion, in proportion to the net proceeds from the offering received
by them; PROVIDED, HOWEVER, that if applicable law does not permit such
allocation, then other relevant equitable considerations such as the relative
fault of the Company and you in the aggregate in connection with the facts which
resulted in such losses, liabilities, claims, damages and expenses shall also be
considered. The relative fault, in the case of an untrue statement, alleged
untrue statement, omission, or alleged omission, shall be determined by, among
other things, whether such statement, alleged statement, omission, or alleged
omission relates to information supplied by the Company or by you, and the
parties' relative intent, knowledge, access to information, and opportunity to
correct or prevent such statement, alleged statement, omission or alleged
omission. The Company and you agree that it would be unjust and inequitable if
the respective obligations of the Company and you for contribution were
determined by PRO RATA or PER CAPITA allocation of the aggregate losses,
liabilities, claims, damages and expenses or by any other method of allocation
that does not reflect the equitable considerations referred to in this Section
6(d). No person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. For purposes of this
Section 6(d), each person, if any, who controls you within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company, shall have the same rights to contribution as the Company, subject
in each case to the provisions of this Section 6(d). Anything in this Section
6(d) to the contrary notwithstanding, no party shall be liable for contribution
with respect to the settlement of any claim or action effected without its
written consent. This Section 6(d) is intended to supersede any right to
contribution under the Act, the Exchange Act, or otherwise.
7. CONDITIONS OF YOUR OBLIGATIONS: Your obligations hereunder are
subject to the continuing accuracy of the representations and warranties of the
Company contained herein and in each certificate and document contemplated under
this Agreement to be delivered to you, as of the date hereof, as of the Closing
Date, and each Optional Closing Date, as the case may be, to the performance by
the Company of their respective obligations hereunder, and to the following
additional conditions:
(a) Notification that the Registration Statement has become effective shall
be received by you not later than 6:30 p.m., New York City time, on the
date of this Agreement or at such later date and time as shall be
consented to in writing by you. 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
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have provided evidence satisfactory to you of such timely filing, or a
post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements
of Rule 430A of the Rules and Regulations.
(b) The Commission shall not have issued a Stop Order and no Blue Sky or
securities authority of any jurisdiction shall have issued an order
suspending the registration or qualification of the Securities, and no
proceedings for such purpose shall have been instituted or shall be
pending, or to the knowledge of the Company, be threatened or
contemplated by the Commission or the Blue Sky or securities authorities
of any such jurisdiction.
(c) You shall have received an opinion, dated the Closing Date and
satisfactory in form and substance to your counsel from Matthias & Berg
LLP, counsel to the Company, to the effect that:
(1) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of Delaware, its
jurisdiction of incorporation, with full corporate power and
authority to own its property and conduct its business in the
manner described in the Prospectus. To the knowledge of such
counsel, the Company has obtained all necessary consents,
authorizations, approvals, orders, licenses, certificates,
declarations and permits of and from, and has made all required
filings with, all federal, state, local and other governmental
authorities and all courts and other tribunals, to own, lease,
license and use its properties and assets and to carry on its
business in the manner described in the Prospectus. The Company
is duly registered or qualified to do business as a foreign
corporation and is in good standing in each other jurisdiction in
which the ownership, leasing, licensing, or use of its property
and assets or the conduct of its business require such
registration or qualification.
(2) The authorized capital stock of the Company consists of 70,000,000
shares of Common Stock, of which_________ shares are outstanding,
and 1,000,000 shares of Preferred Stock, $.0001 par value, of
which no shares are outstanding. Each outstanding share of Common
Stock is validly authorized, validly issued, fully paid, and
nonassessable, with no personal liability attaching to the
ownership thereof, has not been issued and is not owned or held in
violation of any preemptive right of shareholders. There is no
commitment, plan or arrangement to issue, and no outstanding
option, warrant or other right calling for the issuance of, any
share of capital stock of the Company or any security or other
instrument which by its terms is convertible into, exercisable
for, or exchangeable for capital stock of the Company, except as
disclosed in the Prospectus. There is outstanding no security or
other instrument which by its terms is convertible into or
exchangeable for capital stock of the Company.
(3) To the knowledge of such counsel, there is no litigation,
arbitration, claim, governmental or other proceeding (formal or
informal), or investigation pending or threatened, with respect to
the Company or any of its operations, business, property or
assets, except as disclosed in the Prospectus or such as
individually or in the aggregate do not now have and are not
expected to have a material adverse effect on the operations,
business, property, assets or condition (financial or otherwise)
of the Company. The Company is not in violation of, or in default
with respect to, any law, rule or regulation, or to the knowledge
of such counsel, after reasonable investigation, any order,
judgment or decree,
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<PAGE>
except as disclosed in the Prospectus or such as individually or
in the aggregate do not now have and are not expected to have a
material adverse effect on the operations, businesses, property,
assets or condition (financial or otherwise) of the Company; nor
is the Company required to take any action in order to avoid any
such violation or default.
(4) Except as disclosed in the Prospectus, the Company is not now in
violation or breach of, or in default with respect to complying
with, any material provision of any indenture, mortgage, deed of
trust, debenture, note or other evidence of indebtedness,
contract, agreement, instrument, lease or license, or arrangement
or understanding which is material to the Company, and each such
indenture, mortgage, deed of trust, debenture, note or other
evidence of indebtedness, contract, agreement, instrument, lease
or license is in full and force and is the legal, valid and
binding obligation of the Company.
(5) The Company is not in violation or breach of, or in default with
respect to, any term of its Certificate of Incorporation or
By-laws.
(6) The Company has all requisite corporate power and authority to
execute, deliver and perform this Agreement and the Underwriters'
Warrant. All necessary corporate proceedings of the Company have
been taken to authorize the execution, delivery, and performance
by the Company of this Agreement and the Underwriters' Warrant.
This Agreement and the Underwriters' Warrant have been duly
authorized, executed and delivered by the Company, constitute
legal, valid, and binding agreements of the Company, and (subject
to applicable bankruptcy, insolvency, reorganization and other
laws affecting the enforceability of creditors' rights generally,
and the application of equitable principles affecting the
enforceability of remedies in the nature of specific enforcement,
and except as the enforceability of the indemnification and
contribution provisions of this Agreement and the Underwriters'
Warrant may be limited under applicable securities laws) is
enforceable as to the Company in accordance with its terms. The
Underwriters' Warrant has been duly authorized by the Company and,
when executed, issued and delivered by the Company and paid for by
you in accordance with the provisions of this Agreement, will be a
legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with their respective terms,
except as may be limited by applicable bankruptcy, insolvency,
registration and other laws affecting the enforceability of
creditors' rights generally and the application of equitable
principles affecting the availability of remedies in the nature of
specific enforcement.
(7) All legally required proceedings in connection with the
authorization, issue and sale of the Shares by the Company in
accordance with the provisions of this Agreement have been taken,
and no consent, authorization, approval, order, license,
certificate, declaration or permit of or from, or filing with, any
governmental or regulatory authority, agency, board, bureau or
other body or is required for the execution, delivery or
performance by the Company of this Agreement and the Underwriters'
Warrant (except filings with and orders of the Commission pursuant
to the Act which have been made or received and matters under Blue
Sky or state securities laws, rules or regulations, as to which
such counsel need not express an opinion).
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(8) No consent of any party to any material contract, agreement,
instrument, lease or license, or arrangement or understanding
known to such counsel, to which the Company is a party, or to
which any of the property or assets of the Company is subject, is
required for the execution, delivery or performance of this
Agreement or the Underwriters' Warrant; and the execution,
delivery and performance of this Agreement and the Underwriters'
Warrant will not violate, result in a breach of, conflict with, or
(with or without the giving of notice or the passage of time or
both) entitle any party to terminate or call a default under any
such contract, agreement, instrument, lease, license, arrangement
or understanding, result in the creation or imposition of any
lien, security interest, pledge, charge or other encumbrance upon
any of the property or assets of the Company pursuant to the terms
of any indenture, mortgage, deed of trust, loan or credit
agreement, lease or other agreement or instrument to which the
Company is a party or by which the Company is bound or to which
any of the property or assets of the Company is subject, known to
such counsel, or violate or result in a breach of any term of the
Certificate of Incorporation or By-laws of the Company, or
violate, result in a breach of, or conflict with any law, rule,
regulation, order, judgment or decree binding on the Company or to
which the operations, business, property or assets of the Company
are subject to.
(9) The Shares are validly authorized. Upon payment of the purchase
price thereunder in accordance with the provisions of this
Agreement, the Underwriters' Warrant will be duly delivered. The
Shares, when issued, paid for and delivered in accordance with the
provisions of this Agreement, will be validly issued, fully paid
and nonassessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any
preemptive rights of shareholders. Upon payment of the purchase
price therefor in accordance with the provisions of this
Agreement, you will receive good title to the Shares and the
Underwriters' Warrant purchased by it from the Company, free and
clear of all Liens.
(10) The Underwriters' Warrant Shares are validly authorized and have
been duly and validly reserved for issuance, and when issued, paid
for and delivered upon exercise of the Underwriters' Warrant in
accordance with the provisions of the Underwriters' Warrant will
be validly authorized, validly issued, fully paid, and
nonassessable, with no personal liability attaching to the
ownership thereof, and will not have been issued in violation of
any preemptive rights of shareholders, and the holders of the
Underwriters' Warrant Shares will receive good title to them, free
and clear of all Encumbrances.
(11) The Shares and the Underwriters' Warrant Shares conform to all
statements relating thereto contained in the Registration
Statement and the Prospectus.
(12) To the knowledge of such counsel, any contract, agreement,
instrument, lease or license required to be described in the
Registration Statement or the Prospectus has been properly
described therein. To the knowledge of such counsel, any
contract, agreement, instrument, lease, or license required to be
filed as an exhibit to the Registration Statement has been filed
with the Commission as an exhibit to or has been incorporated as
an exhibit by reference into the Registration Statement.
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<PAGE>
(13) The Shares are duly authorized for quotation on the NASDAQ
National Market, subject to notice of issuance.
(14) To the knowledge of such counsel, no person or entity has the
right to require registration of shares of Common Stock or other
securities of the Company because of the filing or effectiveness
of the Registration Statement who has not waived such right.
(15) The Company is not an "investment company" by reason of its assets
and operations as defined in Section 3(a) of the Investment
Company Act.
(16) None of the shares of Common Stock issued by the Company prior to
the date hereof have been offered and sold by the Company in
violation of the Act or applicable Blue Sky or state securities
laws or rules or regulations. All shares of Common Stock
outstanding as of the date hereof have been duly authorized and
validly issued, and are fully paid and non-assessable, with no
personal liability attaching to the ownership thereof, and have
not been issued in violation of any preemptive rights of
shareholders.
(17) The statements in the Prospectus under captions "Business", "Risk
Factors", "Use of Proceeds", "Management" and "Description of
Capital Stock" have been reviewed by such counsel and insofar as
such statements refer to descriptions of agreements, instruments
or leases, summarize the status of litigation or other
proceedings, or the provisions of orders, judgments or decrees, or
constitute statements of law, descriptions of statutes, rules or
regulations, or conclusions of law, such statements fairly present
the information called for and are accurate and complete in all
material respects.
(18) (except for liabilities and obligations incurred in the ordinary
course of business, to the knowledge of such counsel, after due
inquiry, there are no claims (absolute, accrued, contingent or
otherwise), except as disclosed in the Prospectus or such as
individually or in the aggregate do not have and are not expected
to have a material adverse effect upon the operations, businesses,
property, assets or condition (financial or otherwise) of the
Company; and
(19) The Registration Statement has become effective under the Act, and
to the knowledge of such counsel, no Stop Order has been issued
and no proceedings for that purpose have been instituted or
threatened.
(20) The Registration Statement, any Rule 430A Prospectus, and the
Prospectus, and any amendment or supplement thereto (except for
the financial statements and the notes and schedules related
thereto, and other financial information and statistical data
contained therein or omitted therefrom, as to which such counsel
need express no opinion), comply as to form in all material
respects with the applicable requirements of the Act.
(21) Such counsel has participated in the preparation of the
Registration Statement and the Prospectus and any amendments or
supplements thereto, and in the course thereof participated in
conferences with officers and other representatives of the
Company, representatives of the independent certified public
accountants for the Company and your representatives at which the
contents of the Registration Statement and Prospectus and
21
<PAGE>
related matters were discussed and, although such counsel is not
passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in
the Registration Statement and Prospectus, or any amendment or
supplement thereto, on the basis of the foregoing, no facts have
come to the attention of such counsel which lead them to believe
that either the Registration Statement or any amendment thereto at
the time such Registration Statement or such amendment became
effective or the Prospectus as of its date or any amendment or
supplement thereto as of its date 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 (it being understood that such counsel need express no
comment with respect to the financial statements, and the notes
and schedules related thereto, and other financial information and
statistical data included in the Registration Statement or
Prospectus).
(22) To the knowledge of such counsel, since the effective date of the
Registration Statement, no event has occurred which should have
been set forth in an amendment or supplement to the Registration
Statement or the Prospectus which has not been set forth in such
an amendment or supplement.
In rendering such opinion, counsel for the Company may rely (i) as to
matters involving the application of laws other than the laws of the United
States, to the extent counsel for the Company deems proper and to the extent
specified in such opinion, upon an opinion or opinions of local counsel (in form
and substance satisfactory to your counsel) acceptable to your counsel, familiar
with the applicable laws, in which case the opinion of counsel for the Company
shall state that the opinion or opinions of such other counsel are satisfactory
in scope, form and substance to counsel for the Company and that reliance
thereon by counsel for the Company is reasonable; (ii) as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company; and (iii) to the extent they deem proper, upon written statements or
certificates of officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to your counsel.
(d) You shall have received letters addressed to you and dated the date
hereof and the Closing Date from Singer Lewak Greenbaum & Goldstein LLP,
independent certified public accountants for the Company, addressed to
you, and in form and substance satisfactory to you, to the effect that:
(1) Such accountants are independent public accountants as required by
the Act and the rules and regulations of the Commission thereunder
and no information need be supplied with respect to them in answer
to Item ___ of Form S-1.
(2) In their opinion, the financial statements and related notes of
the Company examined by them, at all dates and for all periods
referred to in their report therein, and included in the
Registration Statement and the Prospectus on their authority as
experts comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations of the Commission promulgated thereunder.
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<PAGE>
(3) On the basis of limited procedures not constituting an audit,
including a reading of the latest available unaudited interim
financial statements of the Company and the financial data and
accounting records of the Company, inquiries of officials of the
Company and others responsible for financial and accounting
matters, a reading of the minute books of the Company, including
without limitation the minutes (if any) of meetings or consents in
lieu of meetings of the shareholders and of the Board of Directors
(and any committees thereof) of the Company, and other specified
procedures and inquiries requested by you, if any, nothing has
come to their attention which causes them to believe that:
(i) except as disclosed in or contemplated by the Registration
Statement and the Prospectus, during the period from the
date of the last audited balance sheet of the Company
included in the Registration Statement and Prospectus to a
specified date not more than five (5) days prior to the
date of such letter, there were any decreases, as compared
with the corresponding period of the preceding year, in net
sales, cost of goods sold, operating, selling, general and
administrative expenses, earnings from operations, the
total or per share amounts of net earnings, or the weighted
average number of shares outstanding;
(ii) except as disclosed in or contemplated by the Registration
Statement and the Prospectus, during the period from the
date of the last audited balance sheet of the Company
included in the Registration Statement and Prospectus to a
specified date not more than five (5) days prior to the
date of such letter, there has been any change in the
capital stock or other securities of the Company or any
payment or declaration of any dividend or other
distribution in respect thereof or in exchange therefor, or
any increase in the long-term debt of the Company or any
decrease in the net current assets or net assets of the
Company as compared with the amounts shown on the last
audited balance sheet of the Company, included in the
Registration Statement and the Prospectus (other than in
the ordinary course of business); and
(iii) On the basis of their examinations referred to in their
report and consent included in the Registration Statement
and Prospectus and the indicated procedures and inquiries
referred to above, nothing has come to their attention
which, in their judgment, would cause them to believe or
indicate that the financial statements and related notes
and schedules of the Company included in the Registration
Statement and Prospectus do not present fairly the
financial position and results of operations of the
Company, as at the dates and for the periods indicated, in
conformity with generally accepted accounting principles
applied on a consistent basis, and are not in all material
respects a fair presentation of the information purported
to be shown.
(4) In addition to their examination referred to in their report
included in the Registration Statement and the Prospectus and the
inquiries and limited procedures referred to in clause (ii) of
this Section 7(e), they have performed other procedures, not
constituting an audit, with respect to certain numerical data,
percentages, dollar amounts and other financial information
appearing in the Registration Statement and the Prospectus, which
are derived from the general accounting records of the Company,
and have compared
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<PAGE>
certain of such data and information with the accounting records
of the Company and found them to be in agreement.
(5) Such other matters as you may have reasonably requested.
(e) The representations and warranties of the Company in this Agreement shall
be true and correct with the same effect as if made on and as of the
Closing Date and the Company shall have complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to the Closing Date.
(g) The Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements which are required to be
stated therein in accordance with the Act and the Rules and Regulations,
and shall in all material respects conform to the requirements thereof,
and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto shall contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(h) There shall have been, since the respective dates as of which information
is given in the Registration Statement and the Prospectus, no material
adverse change in the business, property, condition (financial or
otherwise), results of operations, capital stock, long-term or short-term
debt or general affairs of the Company, except changes which the
Registration Statement and the Prospectus indicate might occur after the
effective date of the Registration Statement, and the Company shall not
have incurred any material liabilities or entered into any agreements not
in the ordinary course of business, except as disclosed in the
Registration Statement and the Prospectus.
(i) No action, suit or proceeding, at law or in equity, shall be pending or
threatened against the Company which would be required to be set forth in
the Registration Statement, and no proceedings shall be pending or
threatened against the Company before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would have a materially adverse
affect on the business, property, condition (financial or otherwise),
results of operations or general affairs of the Company.
(j) The Company shall have furnished to you or caused to be furnished to you
at the Closing Date, certificates of the President and chief financial
officer of the Company, in form and substance satisfactory to you, as to
the accuracy of the representations and warranties of the Company, herein
at and as of the Closing Date and as to the performance by the Company of
all its respective obligations hereunder to be performed at or prior to
the Closing Date and the Company shall have furnished to you a
certificate of the President and chief financial officer of the Company
satisfactory to you as to the matters set forth in Sections 7(a) and (b)
above.
(k) The NASDR, upon review of the terms of the public offering of the Shares,
shall have indicated that it has no objections to the underwriting
arrangements pertaining to the sale of the Shares and the participation
by you in the sale of the Shares.
(l) Prior to or on the Closing Date, the Company shall have executed and
delivered the Underwriters' Warrant to you.
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(m) Prior to or on the Closing Date, the Company shall have delivered to you
executed copies of the Lock-up Letters.
(n) Subsequent to the date hereof, there shall not have occurred any change,
or any development involving a prospective change, in or affecting
particularly the business or financial affairs of the Company which would
materially and adversely affect the market for the Shares.
(o) Subsequent to the date hereof, no executive officer of the Company listed
as such in the Prospectus shall have died, become physically or mentally
disabled, resigned or have been removed or discharged.
(p) The Company shall furnish you with such further certificates and
documents as you or your counsel shall have reasonably requested.
All opinions, certificates, letters and other documents required by this
Section 7 to be delivered to you by the Company will be in compliance with the
provisions hereof only if they are satisfactory in form and substance to you and
your counsel. The Company will furnish you with such conformed copies of such
opinions, certificates, letters and other documents as you shall reasonably
request.
(q) Upon the exercise, in whole or in part, by you of the option to purchase
the Additional Shares, referred to in Section 2 hereof, your obligations
to purchase and pay for the Additional Shares will be subject to the
continuing accuracy of the representations and warranties of the Company
and contained herein and in each certificate and document contemplated
under this Agreement to be delivered to you, as of the date hereof and as
of each Optional Closing Date, to the performance by the Company of its
obligations hereunder, and the following additional conditions:
(1) The Registration Statement shall remain effective at the Optional
Closing Date, and no Stop Order shall have been issued by the
Commission and no proceedings for that purpose shall have been
instituted or shall be pending, or to your knowledge or the
knowledge of the Company, shall be contemplated by the Commission,
and any reasonable request on the part of the Commission for
additional information shall have been complied with to the
satisfaction of Lehman & Eilen, your counsel.
(2) You shall have received an opinion, dated the Optional Closing
Date and satisfactory in form and substance to counsel to you,
from Matthias & Berg LLP, counsel to the Company, which opinion
shall be substantially the same in scope and substance as the
opinion furnished to you on the Closing Date pursuant to Section
7(c) hereof, except that such opinion, where appropriate, shall
cover the Additional Shares.
(3) You shall have received a letter in form and substance
satisfactory to you from Singer Lewak Greenbaum & Goldstein LLP,
independent certified public accountants for the Company, dated
the Optional Closing Date and addressed to you confirming the
information in their letter referred to in Section 7(d) hereof and
stating that nothing has come to their attention during the period
from the ending date of their review referred to in said letter to
a date not more than five (5) days prior to the Optional Closing
Date,
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which would require any change in said letter if it were required
to be dated the Optional Closing Date.
(4) You shall have received a certificate of the President and chief
financial officer of the Company, dated the Optional Closing Date,
in form and substance satisfactory to you, substantially the same
in scope and substance as the certificate furnished to you on the
Closing Date pursuant to Section 7(j) hereof.
8. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective at 9:30 A.M., New York City
time, on the first full business day following the day on which the Registration
Statement becomes effective or at the time of the initial public offering by you
of the Shares, whichever is earlier. The time of the initial public offering
shall mean the time, after the Registration Statement becomes effective, of the
release by you for publication of the first newspaper advertisement which is
subsequently published relating to the Shares or the time, after the
Registration Statement becomes effective, when the Shares are first released by
you for offering by you or dealers by letter or telegram, whichever shall first
occur. You or the Company may prevent this Agreement from becoming effective
without liability of any party to any other party, except as noted below in this
Section 8, by giving the notice indicated in Section 8(c) before the time this
Agreement becomes effective.
(b) In addition to the right to terminate this Agreement pursuant to
Section 7 hereof by reason of the Company's failure, refusal or inability to
perform all obligations and satisfy all conditions on their part to be performed
or satisfied hereunder prior to the Closing Date or Optional Closing Date, as
the case may be, you shall have the right to terminate this Agreement at any
time prior to the Closing Date or any Optional Closing Date, as the case may be,
by giving notice to the Company, if the Company shall have sustained a material
loss or material adverse interference with its business or properties from fire,
flood, accident, hurricane, earthquake, theft, sabotage, or other calamity or
malicious act, including the death or disability of George W. Smith, whether or
not covered by insurance, or from any labor dispute or any court or governmental
action, order or decree, of such a character as to have a material adverse
effect with the conduct of the business and operations of the Company; or if
there shall have been a general suspension of, or a general limitation on prices
for, trading in securities on the New York Stock Exchange, the American Stock
Exchange or in the over-the-counter market; or if a banking moratorium has been
declared by a state or federal authority; or if there shall have been an
outbreak of major hostilities between the United States and any foreign power,
or any other insurrection, armed conflict or national calamity, which in the
judgment of a majority-in-interest of the underwriters, makes it impracticable
or inadvisable to proceed with the offering, sale or delivery of the Firm Shares
or the Additional Shares, as the case may be.
(c) If you elect to prevent this Agreement from becoming effective as
provided in this Section 8, or to terminate this Agreement pursuant to Section 7
or this Section 8, you shall notify the Company promptly by telephone,
telecopier, telex, or telegram, confirmed by letter. If, as so provided in this
Section 8, the Company elects to prevent this Agreement from becoming effective,
the Company shall notify you promptly by telephone, telecopier, telex, or
telegram, confirmed by letter.
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(d) Anything in this Agreement to the contrary notwithstanding other
than Section 8(e), if this Agreement shall not become effective by reason of an
election pursuant to this Section 8 or if this Agreement shall terminate or
shall otherwise not be carried out within the time specified herein by reason of
any failure on the part of the Company to perform any covenant or agreement or
satisfy any condition of this Agreement by it to be performed or satisfied, the
sole liability of the Company to you, in addition to the obligations the Company
assumed pursuant to Section 4(g), will be to reimburse you for such
out-of-pocket expenses (including the fees and disbursements of their counsel)
as shall have been incurred by them in connection with this Agreement or the
proposed offer, sale, and delivery of the Shares, and upon demand the Company
agrees to pay promptly the full amount thereof to you.
(e) Notwithstanding any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Sections 4(b), 4(g), 6, 10(b) and 10(c) shall not be in any way
affected by such election or termination or failure to carry out the terms of
this Agreement or any part hereof.
9. SUBSTITUTION OF UNDERWRITERS.
If any one or more of the Underwriters shall fail or refuse to purchase
any of Shares which it or they have agreed to purchase hereunder, and the number
of Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of
Shares, the other Underwriters shall be obligated, severally, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase, in the proportions which the number of Shares which they
have respectively agreed to purchase pursuant to Section 2 hereof bears to the
aggregate number of Shares which all such non-defaulting Underwriters have so
agreed to purchase or in such other proportions as you may specify, provided
that in no event shall the maximum number of Shares which any Underwriter has
become obligated to purchase pursuant to Section 2 hereof be increased pursuant
to this Section 9 by more than one-ninth of such number of Shares, without the
written consent of such Underwriter. If any Underwriter or Underwriters shall
fail or refuse to purchase any Shares and the aggregate number of Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase exceeds one-tenth of the aggregate number of Shares and arrangements
satisfactory to you and the Company for the purchase of such Shares are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company for the
purchase or sale of any Shares under this Agreement. In any such case either
you or the Company shall have the right to postpone the Closing Date, but in no
event for longer than five business days, in order that the required changes, if
any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in respect
of any default of such Underwriter under this Agreement.
10. MISCELLANEOUS: (a) Notices required to be in writing shall be
mailed or delivered (i) to the Company at the Company's office at 100 North
Sepulveda Boulevard, Suite 601, El Segundo, CA 90245, with copies to Matthias &
Berg LLP, 1990 South Bundy Drive, Suite 790, Los Angeles, CA 90025 or (ii) to
you, at the office of Nichols, Safina, Lerner & Co., Inc., 800 Third Avenue, New
York, New York 10022, Attention: Steven E. Scott, Director of Corporation with
copies to: Lehman & Eilen, 50 Charles Lindbergh Boulevard, Suite 505, Uniondale,
New York 11553, Attention: Hank Gracin, Esq., and shall be deemed given when
received. Any notice not required to be in writing, including but not limited
to notices under Section 7(a) or 8 hereof, may be made by telex, telecopier or
telephone and shall
27
<PAGE>
be deemed given at the time the telex, or telecopied communication is received
or the telephone call is made, but if so made shall be subsequently confirmed in
writing.
(b) The representations, warranties, covenants and agreements of the
Company, and the indemnity and contribution agreements, contained in Sections
4, 5 and 6 of this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of you, the Company or any of its
officers or directors or any controlling persons of you or the Company and
will survive acceptance of and payment for any of the Shares and the
termination of this Agreement.
(c) This Agreement has been and is made solely for the benefit of you,
the Company and the controlling persons, directors and officers referred to
in Section 6 hereof and their respective successors and assigns, and no other
person shall acquire or have any right under or by virtue of this Agreement.
The term "successors and assigns" as used in this Agreement shall not include
a purchaser, as such purchaser, of Shares from you.
(d) This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, applicable to contracts made and to be
performed entirely with such State, without regard to conflict of laws
provisions thereof.
Please confirm that the foregoing correctly sets forth the agreement
among the Company and you.
Very truly yours,
INTERNATIONAL META SYSTEMS, INC.
By:__________________________________________
George W. Smith, Chief Executive Officer
Confirmed, as of the date first above mentioned.
NICHOLS, SAFINA & LERNER, INC.
By:___________________________________________
Steven E. Scott, Director of Corporations
28
<PAGE>
SCHEDULE I
Underwriting Agreement, dated _____________________________
Underwriter Number of Firm Shares
- ----------- ---------------------
Nichols, Safina, Lerner & Co., Inc . . . . . . .
Total . . . . . . . . . . . . . . . .
29
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
INTERNATIONAL META SYSTEMS, INC.
This Certificate of Amendment of Certificate of Incorporation (the
"Certificate") of International Meta Systems, Inc. (the "Corporation"), was
unanimously adopted by the Board of Directors of the Corporation on April 30,
1996 and duly adopted and approved by the stockholders of the Corporation on
July 10, 1996, as set forth below, in accordance with Sections 211, 212, 216,
222 and 242 of the General Corporation Law of the State of Delaware.
The vote of the stockholders of the Corporation by which the foregoing
amendments to the Certificate of Incorporation were adopted and approved was
24,162,761 shares in favor, 834,907 shares opposed, 152,325 abstaining and
11,859,836 shares not voting, out of the Corporation's total of 37,009,829
shares issued and outstanding.
The resolution by which the Corporation's stockholders adopted the
amendments to the Certificate of Incorporation, as set forth above, provides
that the FOURTH Article of the Corporation's Articles of Incorporation be
amended to provide in its entirety as follows:
"FOURTH: 1. The total number of shares of stock which the Corporation
shall have authority to issue is Seventy-one million (71,000,000)
shares, of which Seventy Million (70,000,000) shall be in Common
Stock, par value $0.0001 per share, and One Million (1,000,000) shall
be in one or more classes of Preferred Stock, par value $0.0001 per
share.
2. Shares of Preferred Stock may be issued from time to time in one
or more series as may be established from time to time by resolution
of the Board of Directors of the Corporation, each of which series
shall consist of such number of shares and have such distinctive
designation or title as shall be fixed by resolution of the Board of
Directors prior to the issuance of any shares of such series. Each
such class or series of Preferred Stock shall have such voting powers,
full or limited, or no voting powers, and such preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be
stated in such resolution of the
<PAGE>
Board of Directors providing for the issuance of such series of
Preferred Stock. The Board of Directors is further authorized to
increase or decrease (but not below the number of shares of such class
or series then outstanding) the number of shares of any series
subsequent to the issuance of shares of that series."
Further, the resolution by which the Corporation's stockholders adopted the
amendments to the Certificate of Incorporation, as set forth above, provides
that the EIGHTH Article of the Corporation's Articles of Incorporation be
amended to provide in its entirety as follows:
"EIGHTH: 1. At the first Annual Meeting of Stockholders of the
Corporation (the "Annual Meeting") after the authorized number of
directors is Six (6) or more, the Board of Directors shall be divided
into three (3) classes: Class I, Class II and Class III. The number
of directors in each class shall be the whole number contained in such
quotient obtained by dividing the authorized number of directors by
three (3).
2. If a fraction is also contained in such quotient, then additional
directors shall be apportioned as follows: If such fraction is one
third, the additional director shall be a member of Class III; and if
such fraction is two thirds, one of the additional directors shall be
a member of Class II and the other shall be a member of Class III.
Each director shall serve for a term ending on the date of the third
Annual Meeting following the Annual Meeting at which such director was
elected; PROVIDED, HOWEVER, that the directors first elected to Class
I shall serve for a term ending on the date of the first Annual
Meeting following their election, the directors first elected to Class
II shall serve for a term ending on the date of the second Annual
Meeting following their election and the directors first elected to
Class III shall serve for a term ending on the date of the third
Annual Meeting following their election.
Whenever the authorized number of directors shall be reduced to less
than six (6) directors, the existing directors shall serve out the
remainder of their terms based upon their respective classes and each
subsequently elected director shall serve for a one (1) year term. At
such subsequent time as the authorized number of directors is six (6)
or more directors, the prior paragraph shall again become operative.
2
<PAGE>
3. Notwithstanding the foregoing provisions of this Article Eighth:
each director shall serve until his successor is elected and qualified
or until his death, resignation or removal; no decrease in the
authorized number of directors shall shorten the term of any incumbent
director."
IN WITNESS WHEREOF INTERNATIONAL META SYSTEMS, INC., has caused this
certificate to be signed by its President and to be attested to by its Secretary
as of the 4th day of October , 1996.
INTERNATIONAL META SYSTEMS, INC.
By:/s/ George Smith
-----------------------------------------
George Smith, President
By:/s/ Paul Sefchek
-----------------------------------------
Paul Sefchek, Secretary
3
<PAGE>
CERTIFICATE
OF RIGHTS AND PREFERENCES
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
INTERNATIONAL META SYSTEMS, INC.
a Delaware corporation
The undersigned, President of International Meta Systems, Inc., a Delaware
corporation (the "Corporation"), hereby certifies that the following Certificate
of Rights and Preferences of Series A Convertible Preferred Stock (the
"Certificate") has been duly adopted by the Board of Directors of the
Corporation (the "Board of Directors"), as set forth below, pursuant to the
Delaware General Corporation Law, and in connection with the adoption of the
following Certificate, hereby further set forth as follows:
FIRST: 1. The Board of Directors adopted a resolution on and dated June
28, 1995, setting forth the then proposed Certificate, including the rights and
preferences of the Corporation's Series A Convertible Preferred Stock (the
"Series A Preferred Stock"), declaring its advisability, and this Certificate.
2. The resolution by which the Corporation's Board of Directors
adopted the Certificate, as set forth above, provides that whereas the
Corporation's Certificate of Incorporation authorizes the issuance of up to
1,000,000 shares of preferred stock, par value $0.0001 per share (the "Preferred
Stock"), the Corporation hereby provides for a series of Preferred Stock,
consisting of 15,500 shares, designated as the "Series A Convertible Preferred
Stock," (the "Series A Preferred Stock") as follows:
SECOND: 1. DEFINITIONS. For purposes of this Article, the following
definitions shall apply:
"COMMON STOCK" shall mean the common stock, par value $0.0001 per share, of
the Corporation.
"CONVERSION BASE" shall be $0.95 per share, subject to adjustment from time
to time as provided in Section 2(c)(5) of this Article.
"DEFAULTED DIVIDENDS" shall mean dividends for any full calendar
semi-annual period which, as of the date of conversion or redemption, have not
been declared by the Board of Directors or shall remain accrued and unpaid as of
such date.
<PAGE>
"LIQUIDATION PREFERENCE" shall mean $100 per share, subject to adjustment
from time to time as provided in Section 2 (b)(1)(C) of this Article.
"MARKET VALUE" of the Common Stock on any date shall mean the average of
the mean between the closing bid and asked sales prices (or the mean and between
the closing bid and asked quotations if no closing sales price is reported) of
the Common Stock for each business day in the relevant period ending on the date
prior to such date, as reported on the primary securities exchange or securities
market in which the Common Stock shall then be traded, which primary exchange or
market shall be deemed to be the exchange or market from time to time designated
as such by the Board of Directors of the Corporation. If there shall be no
reported sales price or published bid and asked quotations for the Common Stock
during said relevant period, the Market Value shall be deemed to be the
Conversion Base.
"PREFERRED STOCK" shall mean the preferred stock, par value $0.0001 per
share, of the Corporation.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any successor act.
"SERIES A PREFERRED STOCK" shall mean the series of Preferred Stock
designated as the Series A Convertible Preferred Stock by the Corporation's
Board of Directors.
2. DETERMINATION OF PREFERENCES OF SERIES A PREFERRED STOCK. The rights,
preferences, privileges, restrictions and other matters related to the Series A
Preferred Stock in this Article are as follows:
(a) DIVIDEND PROVISIONS.
(1) RIGHT TO DIVIDENDS.
(A) The holders of the Series A Preferred Stock shall be entitled to
receive a cumulative preferential dividend of $8.00 per share PER ANNUM, payable
in cash or Common Stock, at the option of the Corporation, semi-annually, each
July 15 and January 15 commencing January 15, 1996, in arrears.
(B) In the event that the Corporation shall declare a dividend for
any semi-annual period, all dividends declared for any such semi-annual period
for holders of the Series A Preferred Stock shall be paid, if at all, either be
entirely in cash or in Common Stock, as the case may be.
2
<PAGE>
(C) The rate of dividends payable with respect to the Series A
Preferred Stock shall be adjusted from time to time in connection with any stock
split, reverse stock split or reclassification of the Series A Preferred Stock
or Common Stock which would result in an adjustment of the Conversion Base for
such class of stock under Section 2(c)(5) of this Article.
(2) COMMON STOCK DIVIDENDS.
(A) In the event that the Corporation shall declare a dividend for
the Series A Preferred Stock in shares of Common Stock, the Corporation will
issue to each holder of record of Series A Preferred Stock on the Corporation's
books on each June 30 and December 31, respectively, commencing December 31,
1995 (the "Record Date"), as a dividend, that number of shares of the
Corporation's Common Stock, based on the fraction, the numerator of which shall
be the cumulative amount of accrued unpaid dividends as of the Record Date, and
the denominator of which shall be the Market Value for the Common Stock during
the 5-business day period immediately preceding the Record Date.
(B) The Corporation will not issue any fractional shares of Common
Stock as a dividend. However, the Corporation will issue as a dividend to each
such shareholder, in respect of the aggregate number of shares of Series A
Preferred Stock held by any shareholder, one share of Common Stock in respect of
any fractional shares of Common Stock otherwise issuable as a dividend to each
such shareholder.
(C) Dividends in the form of share certificates representing the
shares of Common Stock issued as dividends shall be delivered, postage prepaid,
to the address of each holder of Series A Preferred Stock as shown on the books
of the Corporation. The forwarding of such share certificates shall satisfy
all obligations of the Corporation with respect to such dividends.
(3) CASH DIVIDENDS.
(A) In the event that the Corporation shall declare a dividend for
the Series A Preferred Stock in cash, the holders of the Series A Preferred
Stock shall be entitled to receive such amounts, if any, as a dividend, out of
funds legally available therefor, for each holder of record of the Series A
Preferred Stock on the Corporation's books on each Record Date, commencing
December 31, 1995.
(B) For so long as any shares of the Series A Preferred Stock are
outstanding, no cash dividends shall be declared or paid on the Common Stock
unless all semi-annual dividend payments on the Series A Preferred Stock shall
have been paid or, if not paid, such dividends shall have been declared and
funds therefor shall have
3
<PAGE>
been set aside for payment on or prior to the declaration of a dividend with
respect to the Common Stock.
(b) LIQUIDATION PREFERENCE.
(1) PREFERENCE. In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation, the
assets of the Corporation shall be distributed among the holders of the Series A
Preferred Stock and the Common Stock as follows:
(A) First, an amount equal to the Liquidation Preference, plus all
Defaulted Dividends on the Series A Preferred Stock as of the date of such
dissolution, liquidation or winding-up, shall be paid to the holders of the
Series A Preferred Stock;
(B) Thereafter, all remaining assets of the Corporation, if any,
shall be distributed ratably among the holders of the Common Stock, in
proportion to the number of shares of Common Stock held or deemed to be held;
and
(C) The Liquidation Preference shall be adjusted from time to time
in connection with any stock split, reverse stock split or reclassification of
the Series A Preferred Stock or Common Stock which would result in an adjustment
to the Conversion Base for such class of stock under Section 2(c)(5) of this
Article.
(2) PARTIAL PAYMENT. If upon any dissolution, liquidation or winding up
of the affairs of the Corporation, the assets of the Corporation distributable
among the holders of the Series A Preferred Stock shall be insufficient to
permit the payment to them of the full preferential amounts to which they are
entitled, then the entire assets of the Corporation to be so distributed to such
class shall be distributed ratably among the holders of such class.
(3) REORGANIZATION. For the purposes of this Certificate, a liquidation,
dissolution or winding up of the affairs of the Corporation shall not be deemed
to be occasioned by or to include the sale of all or substantially all of the
assets of the Corporation or the acquisition of the Corporation by another
entity by means of a merger, consolidation or other reorganization.
(c) CONVERSION RIGHTS. The holders of the Series A Preferred Stock shall
have conversion rights (the "Conversion Rights"), respectively as follows:
4
<PAGE>
(1) AUTOMATIC CONVERSION.
(A) Each share of the Series A Preferred Stock shall be automatically
converted into that number of shares of Common Stock determined in accordance
with the provisions of Section 2(c)(4)(A) of this Article on June 30, 1997.
(B) An automatic conversion of the Series A Preferred Stock shall not
require any action of the holders of the shares of the Series A Preferred Stock
and shall not be conditional upon the surrender of the certificates evidencing
such shares to the Corporation or its transfer agent. Upon the effectiveness of
any automatic conversion, the holders of the Series A Preferred Stock so
converted shall have only the rights of the holders of the Common Stock;
PROVIDED, HOWEVER, that the Corporation shall not be obligated to issue
certificates evidencing shares of Common Stock issuable on such conversion
unless certificates, duly endorsed and evidencing such shares of Series A
Preferred Stock being converted, are delivered to the Corporation or its
transfer agent, or the holder notifies the Corporation that such certificates
have been lost, stolen or destroyed and provides the Corporation with such
documentation and indemnification as the Corporation may reasonably request to
protect itself against existence of such alleged lost, stolen or destroyed
certificates. As soon as practicable after notice of the automatic conversion
of the Series A Preferred Stock, the holders of such class shall surrender the
certificates representing such shares duly endorsed, at the office of the
Corporation or its transfer agent. The Corporation shall, as soon as
practicable after such surrender, issue to each holder of such shares, a
certificate or certificates evidencing the number of the shares of Common Stock
(and any other securities or property) to which it shall be entitled.
(2) OPTIONAL CONVERSION.
(A) Each share of the Series A Preferred Stock shall be
convertible, at the option of the holder thereof at any time prior to June 30,
1997 into that number of shares of Common Stock determined in accordance with
the provisions of Section 2(c)(4)(A) of this Certificate; PROVIDED, HOWEVER,
notwithstanding anything to the contrary herein, the holder shall not be
entitled to exercise the optional conversion rights set forth in this Section
2(c)(2) except in connection with the registration of the shares of Common Stock
underlying the Series A Preferred Stock pursuant to a registration statement
filed with the Securities and Exchange Commission under the Securities Act with
respect to an agreement between the Corporation and the holder, and any such
conversion shall be effective only upon the effective date of such a
registration statement.
5
<PAGE>
(B) In order to convert shares of the Series A Preferred Stock
into shares of Common Stock, the holder thereof shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the Corporation or its
transfer agent, together with written notice (the "Conversion Notice") to the
Corporation stating that it elects to convert the same and setting forth the
name or names in which it wishes the certificate or certificates for Common
Stock to be issued, and the number of shares of Series A Preferred Stock being
converted.
(C) The Corporation shall, as soon as practicable after the
surrender of the certificate or certificates evidencing shares of Series A
Preferred Stock for conversion, issue to the holder of such shares a certificate
or certificates evidencing the number of shares of Common Stock (and any other
securities and property) to which it shall be entitled and, in the event that
only a part of the shares evidenced by such certificate or certificates are
converted, a certificate evidencing the number of shares of Series A Preferred
Stock, as the case may be, which are not converted. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Series A Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock at such date and shall, with respect to
such shares, thereafter have only the rights of a holder of Common Stock.
(3) MANDATORY CONVERSION.
(A) Each share of the Series A Preferred Stock shall be
convertible on a mandatory basis by the Corporation into that number of shares
of Common Stock determined in accordance with the provisions of Section
2(c)(4)(A) of this Article, in whole or in part, from time to time, at the
option of the Board of Directors upon not less than ten (10) days' prior written
notice to the holders of record of the shares of Series A Preferred Stock to be
so converted. If less than all of the outstanding shares of Series A Preferred
Stock are to be so converted, the conversion may be made either by lot or PRO
RATA or by such other method as the Board of Directors in its discretion may
determine, including, without limitation of the foregoing, the right to
designate which shareholder shall be required to surrender any part or all of
the shares of Series A Preferred Stock owned by such shareholder. If such
notice of conversion shall have been duly given and if, on or before the
conversion date specified in such notice, all shares of Common Stock necessary
for such conversion shall have been set aside so as to be available therefor,
then notwithstanding that any certificate for shares of Series A Preferred Stock
so called for conversion shall not have been surrendered for cancellation, all
dividends on such shares of Series A Preferred Stock shall forthwith on such
conversion date cease and terminate, except only
6
<PAGE>
the right of holders thereof to receive the number of shares of Common Stock
issuable upon conversion thereof.
(B) The mandatory conversion rights set forth in this Section
2(c)(3) shall not be exercisable by the Corporation until such time as the
Market Value of the Common Stock during any 20-business day period after June
30, 1995 shall be at least $3.00 per share, which amount shall be adjusted from
time to time in connection with any stock split, reverse stock split or
reclassification of the Series A Preferred Stock or Common Stock which would
result in an adjustment of the Conversion Base for such class of stock under
Section 2(c) of this Article.
(C) A mandatory conversion of the Series A Preferred Stock shall
not require any action of the holders of the shares of the Series A Preferred
Stock and shall not be conditional upon the surrender of the certificates
evidencing such shares to the Corporation or its transfer agent. Upon the
effectiveness of any mandatory conversion, the holders of the Series A Preferred
Stock so converted shall have only the rights of the holders of the Common
Stock; PROVIDED, HOWEVER, that the Corporation shall not be obligated to issue
certificates evidencing shares of Common Stock issuable on such conversion
unless certificates, duly endorsed and evidencing such shares of Series A
Preferred Stock being converted, are delivered to the Corporation or its
transfer agent, or the holder notifies the Corporation that such certificates
have been lost, stolen or destroyed and provides the Corporation with such
documentation and indemnification as the Corporation may reasonably request to
protect itself against the existence of such alleged lost, stolen or destroyed
certificates. As soon as practicable after notice of the mandatory conversion
of Series A Preferred Stock, the holders of such class shall surrender the
certificates representing such shares duly endorsed, at the office of the
Corporation or its transfer agent. The Corporation shall, as soon as
practicable after such surrender, issue to each holder of such shares, a
certificate or certificates evidencing the number of the shares of Common Stock
(and any other securities or property) to which it shall be entitled.
(4) NUMBER OF SHARES
(A) Each share of the Series A Preferred Stock shall be convertible
into a number of shares of Common Stock equal to a fraction, the numerator of
which shall be the Liquidation Preference and the denominator of which shall be
the Conversion Base, subject to adjustment from time to time in connection with
any stock split, reverse stock split or reclassification of the Series A
Preferred Stock or Common Stock which would result in an adjustment to the
Conversion Base for such class of stock under Section 2(c)(5) of this Article.
7
<PAGE>
(B) No fractional shares of Common Stock or scrip shall be issued upon
conversion of the Series A Preferred Stock. If more than one share of Series A
Preferred Stock shall be surrendered for conversion at any one time by the same
holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series A Preferred Stock so surrendered. If the computation for determining the
number of shares of Common Stock issuable upon conversion of Series A Preferred
Stock shall result in other than a whole number, the Corporation shall issue to
such shareholder, in respect of the aggregate number of shares of Series A
Preferred Stock held by any shareholder, one share of Common Stock in respect of
any fractional shares of Common Stock otherwise issuable to such shareholder.
(5) STOCK SPLITS, REVERSE STOCK SPLITS, STOCK DIVIDENDS. If
outstanding shares of Common Stock shall be subdivided into a greater number of
shares, or a dividend in Common Stock or other securities of the Corporation
convertible into or exchangeable for Common Stock (in which latter event the
number of shares of Common Stock issuable upon the conversion or exchange of
such securities shall be deemed to have been distributed) shall be paid in
respect of the Common Stock, the Conversion Base in effect immediately prior to
such subdivision or at the record date of such dividend shall each,
simultaneously with the effectiveness of such subdivision or immediately after
the record date of such dividend, be proportionately reduced, and conversely, if
outstanding shares of the Common Stock shall be combined into a smaller number
of shares, the Conversion Base in effect immediately prior to such combination
shall each, simultaneously with the effectiveness of such combination, be
proportionately increased.
Any adjustments to the Conversion Base under this Section 2(c)(5) of this
Article shall become effective at the close of business on the date the
subdivision or combination referred to herein becomes effective.
(6) CERTAIN DISTRIBUTIONS. In the event the Corporation at any time, or
from time to time, shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in securities of the Corporation other than shares of
Common Stock or securities convertible into or exchangeable for Common Stock,
then and in each such event, provision shall be made so that the holders of the
Series A Preferred Stock shall receive upon conversion thereof, in addition to
the number of shares of Common Stock receivable thereupon, the amount of
securities of the Corporation which they would have received had their Series A
Preferred Stock been converted into Common Stock on the date of such event and
had thereafter, during the period from the date of such event to and including
the date of conversion, retained such securities
8
<PAGE>
receivable by them as aforesaid during such period, giving application to all
adjustments called for during such period under this Section 2(c)(6) of this
Article with respect to the rights of the holders of Series A Preferred Stock.
(7) CERTAIN REORGANIZATIONS. In the event of any capital reorganization,
any reclassification of the Common Stock (other than a change in par value or as
a result of a stock dividend, subdivision, split-up or combination of shares),
the consolidation or merger of the Corporation with or into another person, or
the sale or other disposition of all or substantially all of the properties of
the Corporation as an entirety to another person (collectively referred to
hereinafter as a "Reorganization"), the holders of the Series A Preferred Stock
shall thereafter be entitled to receive, and provision shall be made therefor in
any agreement relating to a Reorganization, upon conversion of the Series A
Preferred Stock, the kind and number of shares of Common Stock or other
securities or property (including cash) of the Corporation, or the other
corporation resulting from such consolidation or surviving such merger, which
the Series A Preferred Stock entitled the holder thereof to convert to
immediately prior to such Reorganization; and in any such case appropriate
adjustment shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the holders of the Series
A Preferred Stock to the end that the provisions set forth herein shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares, to such other securities or property thereafter receivable upon
conversion of the Series A Preferred Stock. The provisions of this Section
2(c)(7) of this Article shall similarly apply to successive Reorganizations.
(8) NOTICE OF ADJUSTMENT. In each case of an adjustment or readjustment
of the Conversion Base or the number of shares of Common Stock or other
securities issuable upon conversion of the Series A Preferred Stock, the
Corporation, at its expense, shall prepare a certificate showing such adjustment
or readjustment, and shall mail such certificate, by first-class mail, postage
prepaid, to each holder of the Series A Preferred Stock which is the subject of
adjustment. The certificate shall set forth such adjustment or readjustment,
showing in detail the facts upon which such adjustment or readjustment is based,
including a statement of (A) the Conversion Base at the time in effect for the
Series A Preferred Stock, and (B) the number of shares of Common Stock and the
type and amount, if any, of other property which at the time would be received
upon conversion of such Series A Preferred Stock.
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(9) RESERVATION OF SHARES. The Corporation shall at all times reserve and
keep available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion in respect of the shares of Series A
Preferred Stock, such number of the shares of Common Stock as shall from time to
time be sufficient to effect a conversion in respect of all outstanding shares
of the Series A Preferred Stock, and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
in respect of all then outstanding shares of the Series A Preferred Stock, the
Corporation shall promptly seek such corporate action as may in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
In the event of the consolidation or merger of the Corporation with another
corporation, effective provision shall be made in the certificate or articles of
incorporation, documents of merger or consolidation, or otherwise, of the
surviving corporation so that such corporation will at all times reserve and
keep available a sufficient number of shares of Common Stock or other securities
or property to provide for the conversion in respect of the Series A Preferred
Stock accordance with the provisions of this Section 2(c) of this Article.
(10) TAXES. The Corporation shall pay all taxes and other governmental
charges (other than any income or other taxes imposed upon the profits realized
by the recipient) that may be imposed in respect of the issue or delivery of
shares of Common Stock or other securities or property upon conversion or
issuance of dividends in respect of shares of Series A Preferred Stock,
including without limitation, any tax or other charge (other than any transfer
tax) imposed in connection with the issue and delivery of shares of Common Stock
or other securities at the time of such conversion or issuance of dividends in a
name other than that in which the shares of Series A Preferred Stock so
converted or otherwise held were registered.
(11) CANCELLATION OF CERTIFICATES. All certificates representing Series A
Preferred Stock surrendered for conversion or redemption shall be appropriately
canceled on the books, and the shares so converted or redeemed represented by
such certificates shall be restored to the status of authorized but unissued
shares of undesignated Preferred Stock, but may not be reissued as part of the
Series A Preferred Stock.
(12) NO AVOIDANCE. The Corporation shall not amend the Corporation's
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or attempting to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation.
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(d) VOTING RIGHTS. The holders of the Series A Preferred Stock shall
not have any voting rights.
(e) INTEREST. The holders of the Series A Preferred Stock are not
entitled to any interest on the value of the Preferred Stock.
(f) ADDITIONAL SERIES OF PREFERRED STOCK. Except for the Series A
Preferred Stock, the Board of Directors of the Corporation is authorized to fix
the number of shares of any additional series of Preferred Stock and to
determine the designation of any such series. The Board of Directors is also
authorized to determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock and, within the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting any series, to increase or decrease (but not below the number of
shares of any such series then outstanding) the number of shares of any series
subsequent to the issue of shares of that series.
(g) MISCELLANEOUS.
(1) NOTICES. All notices, requests, consents and other
communications required hereunder shall be in writing and by first class mail or
by registered or certified mail, postage prepaid, return receipt requested, and
shall be deemed to have been duly made when deposited in the mails upon mailing
by first class mail or by registered or certified mail, postage prepaid, return
receipt requested: if addressed to the holder at the last address of such holder
on the books of the Corporation; and if addressed to the Corporation, at 100
North Sepulveda Boulevard, Sixth Floor, El Segundo, California 90245 or such
other address as the Corporation may designate in writing.
(2) HOLDERS. For purposes of this Article, the "holder" of any
share of Common Stock or Series A Preferred Stock shall be the holder of record
of such share as set forth in the stock register of the Corporation, and the
Corporation shall be entitled to treat the holder as the owner of such
securities for all purposes.
IN WITNESS WHEREOF, INTERNATIONAL META SYSTEMS, INC. has caused this
Certificate of Rights and Preferences of Series A Convertible Preferred Stock to
be executed by its President as of June 28, 1995.
INTERNATIONAL META SYSTEMS, INC.
By:/S/ George W. Smith
----------------------------------
George W. Smith, President
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CERTIFICATE
OF RIGHTS AND PREFERENCES
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
INTERNATIONAL META SYSTEMS, INC.
a Delaware corporation
The undersigned, President of International Meta Systems, Inc., a Delaware
corporation (the "Corporation"), hereby certifies that the following Certificate
of Rights and Preferences of Series B Convertible Preferred Stock (the
"Certificate") has been duly adopted by the Board of Directors of the
Corporation (the "Board of Directors"), as set forth below, pursuant to the
Delaware General Corporation Law, and in connection with the adoption of the
following Certificate, hereby further set forth as follows:
FIRST: 1. The Board of Directors adopted a resolution on and dated
October 23, 1995, setting forth the then proposed Certificate, including the
rights and preferences of the Corporation's Series B Convertible Preferred Stock
(the "Series B Preferred Stock"), declaring its advisability, and this
Certificate.
2. The resolution by which the Corporation's Board of Directors
adopted the Certificate, as set forth above, provides that whereas the
Corporation's Certificate of Incorporation authorizes the issuance of up to
1,000,000 shares of preferred stock, par value $0.0001 per share (the "Preferred
Stock"), the Corporation hereby provides for a series of Preferred Stock,
consisting of 40,000 shares, designated as the "Series B Convertible Preferred
Stock," (the "Series B Preferred Stock") as follows:
SECOND: 1. DEFINITIONS. For purposes of this Article, the following
definitions shall apply:
"COMMON STOCK" shall mean the common stock, par value $0.0001 per share, of
the Corporation.
"CONVERSION BASE" shall be $1.25 per share, subject to adjustment from time
to time as provided in Section 2(c)(5) of this Article.
"DEFAULTED DIVIDENDS" shall mean dividends for any full calendar
semi-annual period which, as of the date of conversion or redemption, have not
been declared by the Board of Directors or shall remain accrued and unpaid as of
such date.
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"LIQUIDATION PREFERENCE" shall mean $100 per share, subject to adjustment
from time to time as provided in Section 2 (b)(1)(C) of this Article.
"MARKET VALUE" of the Common Stock on any date shall mean the average of
the mean between the closing bid and asked sales prices (or the mean and between
the closing bid and asked quotations if no closing sales price is reported) of
the Common Stock for each business day in the relevant period ending on the date
prior to such date, as reported on the primary securities exchange or securities
market in which the Common Stock shall then be traded, which primary exchange or
market shall be deemed to be the exchange or market from time to time designated
as such by the Board of Directors of the Corporation. If there shall be no
reported sales price or published bid and asked quotations for the Common Stock
during said relevant period, the Market Value shall be deemed to be the
Conversion Base.
"PREFERRED STOCK" shall mean the preferred stock, par value $0.0001 per
share, of the Corporation.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any successor act.
"SERIES A PREFERRED STOCK" shall mean the series of Preferred Stock
designated as the Series A Convertible Preferred Stock by the Corporation's
Board of Directors.
"SERIES B PREFERRED STOCK" shall mean the series of Preferred Stock
designated as the Series B Convertible Preferred Stock by the Corporation's
Board of Directors.
2. DETERMINATION OF PREFERENCES OF SERIES B PREFERRED STOCK. The rights,
preferences, privileges, restrictions and other matters related to the Series B
Preferred Stock in this Article are as follows:
(a) DIVIDEND PROVISIONS.
(1) RIGHT TO DIVIDENDS.
(A) The holders of the Series B Preferred Stock shall be entitled to
receive a cumulative preferential dividend of $8.00 per share PER ANNUM, payable
in cash or Common Stock, at the option of the Corporation, semi-annually, each
June 30 and December 31 commencing June 30, 1996, in arrears.
(B) In the event that the Corporation shall declare a dividend for
any semi-annual period, all dividends declared for any such semi-annual period
for holders of the Series B Preferred Stock shall be paid, if at all, either be
entirely in cash or in Common Stock, as the case may be.
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(C) The rate of dividends payable with respect to the Series B
Preferred Stock shall be adjusted from time to time in connection with any stock
split, reverse stock split or reclassification of the Series B Preferred Stock
or Common Stock which would result in an adjustment of the Conversion Base for
such class of stock under Section 2(c)(5) of this Article.
(2) COMMON STOCK DIVIDENDS.
(A) In the event that the Corporation shall declare a dividend for
the Series B Preferred Stock in shares of Common Stock, the Corporation will
issue to each holder of record of Series B Preferred Stock on the Corporation's
books on each June 30 and December 31, respectively, commencing June 30, 1996
(the "Record Date"), as a dividend, that number of shares of the Corporation's
Common Stock, based on the fraction, the numerator of which shall be the
cumulative amount of accrued unpaid dividends as of the Record Date, and the
denominator of which shall be the Market Value for the Common Stock during the
5-business day period immediately preceding the Record Date.
(B) The Corporation will not issue any fractional shares of Common
Stock as a dividend. However, the Corporation will issue as a dividend to each
such shareholder, in respect of the aggregate number of shares of Series B
Preferred Stock held by any shareholder, one share of Common Stock in respect of
any fractional shares of Common Stock otherwise issuable as a dividend to each
such shareholder.
(C) Dividends in the form of share certificates representing the
shares of Common Stock issued as dividends shall be delivered, postage prepaid,
to the address of each holder of Series B Preferred Stock as shown on the books
of the Corporation. The forwarding of such share certificates shall satisfy
all obligations of the Corporation with respect to such dividends.
(3) CASH DIVIDENDS.
(A) In the event that the Corporation shall declare a dividend for
the Series B Preferred Stock in cash, the holders of the Series B Preferred
Stock shall be entitled to receive such amounts, if any, as a dividend, out of
funds legally available therefor, for each holder of record of the Series B
Preferred Stock on the Corporation's books on each Record Date, commencing June
30, 1996.
(B) For so long as any shares of the Series B Preferred Stock are
outstanding, no cash dividends shall be declared or paid on the Common Stock
unless all semi-annual dividend payments on the Series B Preferred Stock shall
have been paid or, if not paid, such dividends shall have been declared and
funds therefor shall have
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<PAGE>
been set aside for payment on or prior to the declaration of a dividend with
respect to the Common Stock.
(b) LIQUIDATION PREFERENCE.
(1) PREFERENCE. In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation, the
assets of the Corporation shall be distributed among the holders of the Series B
Preferred Stock and the Common Stock as follows:
(A) First, an amount equal to the Liquidation Preference, plus all
Defaulted Dividends on the Series A Preferred Stock as of the date of such
dissolution, liquidation or winding-up, shall be paid to the holders of the
Series A Preferred Stock;
(B) Second, an amount equal to the Liquidation Preference, plus all
Defaulted Dividends on the Series B Preferred Stock as of the date of such
dissolution, liquidation or winding-up, shall be paid to the holders of the
Series B Preferred Stock;
(C) Thereafter, all remaining assets of the Corporation, if any,
shall be distributed ratably among the holders of the Common Stock, in
proportion to the number of shares of Common Stock held or deemed to be held;
and
(D) The Liquidation Preference shall be adjusted from time to time
in connection with any stock split, reverse stock split or reclassification of
the Series B Preferred Stock or Common Stock which would result in an adjustment
to the Conversion Base for such class of stock under Section 2(c)(5) of this
Article.
(2) PARTIAL PAYMENT. If upon any dissolution, liquidation or winding up
of the affairs of the Corporation, the assets of the Corporation distributable
among the holders of the Series B Preferred Stock shall be insufficient to
permit the payment to them of the full preferential amounts to which they are
entitled, then the entire assets of the Corporation to be so distributed to such
class shall be distributed ratably among the holders of such class.
(3) REORGANIZATION. For the purposes of this Certificate, a liquidation,
dissolution or winding up of the affairs of the Corporation shall not be deemed
to be occasioned by or to include the sale of all or substantially all of the
assets of the Corporation or the acquisition of the Corporation by another
entity by means of a merger, consolidation or other reorganization.
(c) CONVERSION RIGHTS. The holders of the Series B Preferred Stock shall
have conversion rights (the "Conversion Rights"), respectively as follows:
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<PAGE>
(1) AUTOMATIC CONVERSION.
(A) Each share of the Series B Preferred Stock shall be automatically
converted into that number of shares of Common Stock determined in accordance
with the provisions of Section 2(c)(4)(A) of this Article on November 30, 1997.
(B) An automatic conversion of the Series B Preferred Stock shall not
require any action of the holders of the shares of the Series B Preferred Stock
and shall not be conditional upon the surrender of the certificates evidencing
such shares to the Corporation or its transfer agent. Upon the effectiveness of
any automatic conversion, the holders of the Series B Preferred Stock so
converted shall have only the rights of the holders of the Common Stock;
PROVIDED, HOWEVER, that the Corporation shall not be obligated to issue
certificates evidencing shares of Common Stock issuable on such conversion
unless certificates, duly endorsed and evidencing such shares of Series B
Preferred Stock being converted, are delivered to the Corporation or its
transfer agent, or the holder notifies the Corporation that such certificates
have been lost, stolen or destroyed and provides the Corporation with such
documentation and indemnification as the Corporation may reasonably request to
protect itself against existence of such alleged lost, stolen or destroyed
certificates. As soon as practicable after notice of the automatic conversion
of the Series B Preferred Stock, the holders of such class shall surrender the
certificates representing such shares duly endorsed, at the office of the
Corporation or its transfer agent. The Corporation shall, as soon as
practicable after such surrender, issue to each holder of such shares, a
certificate or certificates evidencing the number of the shares of Common Stock
(and any other securities or property) to which it shall be entitled.
(2) OPTIONAL CONVERSION.
(A) Each share of the Series B Preferred Stock shall be
convertible, at the option of the holder thereof at any time prior to November
30, 1997 into that number of shares of Common Stock determined in accordance
with the provisions of Section 2(c)(4)(A) of this Certificate; PROVIDED,
HOWEVER, notwithstanding anything to the contrary herein, the holder shall not
be entitled to exercise the optional conversion rights set forth in this Section
2(c)(2) except in connection with the registration of the shares of Common Stock
underlying the Series B Preferred Stock pursuant to a registration statement
filed with the Securities and Exchange Commission under the Securities Act with
respect to an agreement between the Corporation and the holder, and any such
conversion shall be effective only upon the effective date of such a
registration statement.
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(B) In order to convert shares of the Series B Preferred Stock
into shares of Common Stock, the holder thereof shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the Corporation or its
transfer agent, together with written notice (the "Conversion Notice") to the
Corporation stating that it elects to convert the same and setting forth the
name or names in which it wishes the certificate or certificates for Common
Stock to be issued, and the number of shares of Series B Preferred Stock being
converted.
(C) The Corporation shall, as soon as practicable after the
surrender of the certificate or certificates evidencing shares of Series B
Preferred Stock for conversion, issue to the holder of such shares a certificate
or certificates evidencing the number of shares of Common Stock (and any other
securities and property) to which it shall be entitled and, in the event that
only a part of the shares evidenced by such certificate or certificates are
converted, a certificate evidencing the number of shares of Series B Preferred
Stock, as the case may be, which are not converted. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Series B Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock at such date and shall, with respect to
such shares, thereafter have only the rights of a holder of Common Stock.
(3) MANDATORY CONVERSION.
(A) Each share of the Series B Preferred Stock shall be
convertible on a mandatory basis by the Corporation into that number of shares
of Common Stock determined in accordance with the provisions of Section
2(c)(4)(A) of this Article, in whole or in part, from time to time, at the
option of the Board of Directors upon not less than ten (10) days' prior written
notice to the holders of record of the shares of Series B Preferred Stock to be
so converted. If less than all of the outstanding shares of Series B Preferred
Stock are to be so converted, the conversion may be made either by lot or PRO
RATA or by such other method as the Board of Directors in its discretion may
determine, including, without limitation of the foregoing, the right to
designate which shareholder shall be required to surrender any part or all of
the shares of Series B Preferred Stock owned by such shareholder. If such
notice of conversion shall have been duly given and if, on or before the
conversion date specified in such notice, all shares of Common Stock necessary
for such conversion shall have been set aside so as to be available therefor,
then notwithstanding that any certificate for shares of Series B Preferred Stock
so called for conversion shall not have been surrendered for cancellation, all
dividends on such shares of Series B Preferred Stock shall forthwith on such
conversion date cease and terminate, except only
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<PAGE>
the right of holders thereof to receive the number of shares of Common Stock
issuable upon conversion thereof.
(B) The mandatory conversion rights set forth in this Section
2(c)(3) shall not be exercisable by the Corporation until such time as the
Market Value of the Common Stock during any 20-business day period after October
30, 1995 shall be at least $3.00 per share, which amount shall be adjusted from
time to time in connection with any stock split, reverse stock split or
reclassification of the Series B Preferred Stock or Common Stock which would
result in an adjustment of the Conversion Base for such class of stock under
Section 2(c) of this Article.
(C) A mandatory conversion of the Series B Preferred Stock shall
not require any action of the holders of the shares of the Series B Preferred
Stock and shall not be conditional upon the surrender of the certificates
evidencing such shares to the Corporation or its transfer agent. Upon the
effectiveness of any mandatory conversion, the holders of the Series B Preferred
Stock so converted shall have only the rights of the holders of the Common
Stock; PROVIDED, HOWEVER, that the Corporation shall not be obligated to issue
certificates evidencing shares of Common Stock issuable on such conversion
unless certificates, duly endorsed and evidencing such shares of Series B
Preferred Stock being converted, are delivered to the Corporation or its
transfer agent, or the holder notifies the Corporation that such certificates
have been lost, stolen or destroyed and provides the Corporation with such
documentation and indemnification as the Corporation may reasonably request to
protect itself against the existence of such alleged lost, stolen or destroyed
certificates. As soon as practicable after notice of the mandatory conversion
of Series B Preferred Stock, the holders of such class shall surrender the
certificates representing such shares duly endorsed, at the office of the
Corporation or its transfer agent. The Corporation shall, as soon as
practicable after such surrender, issue to each holder of such shares, a
certificate or certificates evidencing the number of the shares of Common Stock
(and any other securities or property) to which it shall be entitled.
(4) NUMBER OF SHARES
(A) Each share of the Series B Preferred Stock shall be convertible
into a number of shares of Common Stock equal to a fraction, the numerator of
which shall be the Liquidation Preference and the denominator of which shall be
the Conversion Base, subject to adjustment from time to time in connection with
any stock split, reverse stock split or reclassification of the Series B
Preferred Stock or Common Stock which would result in an adjustment to the
Conversion Base for such class of stock under Section 2(c)(5) of this Article.
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<PAGE>
(B) No fractional shares of Common Stock or scrip shall be issued upon
conversion of the Series B Preferred Stock. If more than one share of Series B
Preferred Stock shall be surrendered for conversion at any one time by the same
holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series B Preferred Stock so surrendered. If the computation for determining the
number of shares of Common Stock issuable upon conversion of Series B Preferred
Stock shall result in other than a whole number, the Corporation shall issue to
such shareholder, in respect of the aggregate number of shares of Series B
Preferred Stock held by any shareholder, one share of Common Stock in respect of
any fractional shares of Common Stock otherwise issuable to such shareholder.
(5) STOCK SPLITS, REVERSE STOCK SPLITS, STOCK DIVIDENDS. If
outstanding shares of Common Stock shall be subdivided into a greater number of
shares, or a dividend in Common Stock or other securities of the Corporation
convertible into or exchangeable for Common Stock (in which latter event the
number of shares of Common Stock issuable upon the conversion or exchange of
such securities shall be deemed to have been distributed) shall be paid in
respect of the Common Stock, the Conversion Base in effect immediately prior to
such subdivision or at the record date of such dividend shall each,
simultaneously with the effectiveness of such subdivision or immediately after
the record date of such dividend, be proportionately reduced, and conversely, if
outstanding shares of the Common Stock shall be combined into a smaller number
of shares, the Conversion Base in effect immediately prior to such combination
shall each, simultaneously with the effectiveness of such combination, be
proportionately increased.
Any adjustments to the Conversion Base under this Section 2(c)(5) of this
Article shall become effective at the close of business on the date the
subdivision or combination referred to herein becomes effective.
(6) CERTAIN DISTRIBUTIONS. In the event the Corporation at any time, or
from time to time, shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in securities of the Corporation other than shares of
Common Stock or securities convertible into or exchangeable for Common Stock,
then and in each such event, provision shall be made so that the holders of the
Series B Preferred Stock shall receive upon conversion thereof, in addition to
the number of shares of Common Stock receivable thereupon, the amount of
securities of the Corporation which they would have received had their Series B
Preferred Stock been converted into Common Stock on the date of such event and
had thereafter, during the period from the date of such event to and including
the date of conversion, retained such securities receivable by them as aforesaid
during such period, giving
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application to all adjustments called for during such period under this Section
2(c)(6) of this Article with respect to the rights of the holders of Series B
Preferred Stock.
(7) CERTAIN REORGANIZATIONS. In the event of any capital reorganization,
any reclassification of the Common Stock (other than a change in par value or as
a result of a stock dividend, subdivision, split-up or combination of shares),
the consolidation or merger of the Corporation with or into another person, or
the sale or other disposition of all or substantially all of the properties of
the Corporation as an entirety to another person (collectively referred to
hereinafter as a "Reorganization"), the holders of the Series B Preferred Stock
shall thereafter be entitled to receive, and provision shall be made therefor in
any agreement relating to a Reorganization, upon conversion of the Series B
Preferred Stock, the kind and number of shares of Common Stock or other
securities or property (including cash) of the Corporation, or the other
corporation resulting from such consolidation or surviving such merger, which
the Series B Preferred Stock entitled the holder thereof to convert to
immediately prior to such Reorganization; and in any such case appropriate
adjustment shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the holders of the Series
B Preferred Stock to the end that the provisions set forth herein shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares, to such other securities or property thereafter receivable upon
conversion of the Series B Preferred Stock. The provisions of this Section
2(c)(7) of this Article shall similarly apply to successive Reorganizations.
(8) NOTICE OF ADJUSTMENT. In each case of an adjustment or readjustment
of the Conversion Base or the number of shares of Common Stock or other
securities issuable upon conversion of the Series B Preferred Stock, the
Corporation, at its expense, shall prepare a certificate showing such adjustment
or readjustment, and shall mail such certificate, by first-class mail, postage
prepaid, to each holder of the Series B Preferred Stock which is the subject of
adjustment. The certificate shall set forth such adjustment or readjustment,
showing in detail the facts upon which such adjustment or readjustment is based,
including a statement of (A) the Conversion Base at the time in effect for the
Series B Preferred Stock, and (B) the number of shares of Common Stock and the
type and amount, if any, of other property which at the time would be received
upon conversion of such Series B Preferred Stock.
(9) RESERVATION OF SHARES. The Corporation shall at all times reserve and
keep available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion in respect of the shares of Series B
Preferred Stock, such number of the shares of Common Stock as shall from time to
time be sufficient to effect a conversion in respect of all
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outstanding shares of the Series B Preferred Stock, and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion in respect of all then outstanding shares of the Series
B Preferred Stock, the Corporation shall promptly seek such corporate action as
may in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose. In the event of the consolidation or merger of the
Corporation with another corporation, effective provision shall be made in the
certificate or articles of incorporation, documents of merger or consolidation,
or otherwise, of the surviving corporation so that such corporation will at all
times reserve and keep available a sufficient number of shares of Common Stock
or other securities or property to provide for the conversion in respect of the
Series B Preferred Stock accordance with the provisions of this Section 2(c) of
this Article.
(10) TAXES. The Corporation shall pay all taxes and other governmental
charges (other than any income or other taxes imposed upon the profits realized
by the recipient) that may be imposed in respect of the issue or delivery of
shares of Common Stock or other securities or property upon conversion or
issuance of dividends in respect of shares of Series B Preferred Stock,
including without limitation, any tax or other charge (other than any transfer
tax) imposed in connection with the issue and delivery of shares of Common Stock
or other securities at the time of such conversion or issuance of dividends in a
name other than that in which the shares of Series B Preferred Stock so
converted or otherwise held were registered.
(11) CANCELLATION OF CERTIFICATES. All certificates representing Series B
Preferred Stock surrendered for conversion or redemption shall be appropriately
canceled on the books, and the shares so converted or redeemed represented by
such certificates shall be restored to the status of authorized but unissued
shares of undesignated Preferred Stock, but may not be reissued as part of the
Series B Preferred Stock.
(12) NO AVOIDANCE. The Corporation shall not amend the Corporation's
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or attempting to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation.
(d) VOTING RIGHTS. The holders of the Series B Preferred Stock shall
not have any voting rights.
(e) INTEREST. The holders of the Series B Preferred Stock are not
entitled to any interest on the value of the Preferred Stock.
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(f) ADDITIONAL SERIES OF PREFERRED STOCK. Except for the Series B
Preferred Stock, the Board of Directors of the Corporation is authorized to fix
the number of shares of any additional series of Preferred Stock and to
determine the designation of any such series. The Board of Directors is also
authorized to determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock and, within the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting any series, to increase or decrease (but not below the number of
shares of any such series then outstanding) the number of shares of any series
subsequent to the issue of shares of that series.
(g) MISCELLANEOUS.
(1) NOTICES. All notices, requests, consents and other
communications required hereunder shall be in writing and by first class mail or
by registered or certified mail, postage prepaid, return receipt requested, and
shall be deemed to have been duly made when deposited in the mails upon mailing
by first class mail or by registered or certified mail, postage prepaid, return
receipt requested: if addressed to the holder at the last address of such holder
on the books of the Corporation; and if addressed to the Corporation, at 100
North Sepulveda Boulevard, Sixth Floor, El Segundo, California 90245 or such
other address as the Corporation may designate in writing.
(2) HOLDERS. For purposes of this Article, the "holder" of any
share of Common Stock or Series B Preferred Stock shall be the holder of record
of such share as set forth in the stock register of the Corporation, and the
Corporation shall be entitled to treat the holder as the owner of such
securities for all purposes.
IN WITNESS WHEREOF, INTERNATIONAL META SYSTEMS, INC. has caused this
Certificate of Rights and Preferences of Series B Convertible Preferred Stock to
be executed by its President as of October 23, 1995.
INTERNATIONAL META SYSTEMS, INC.
By:/s/ George W. Smith
--------------------------------
George W. Smith, President
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_____________, 1997
International Meta Systems, Inc.
100 North Sepulveda Boulevard
Suite 601
El Segundo, California 90245
RE: INTERNATIONAL META SYSTEMS, INC.
REGISTRATION STATEMENT ON FORM S-1
(FILE NO. 33- )
-----------------------------------
Gentlemen:
As counsel for International Meta Systems, Inc. (the "Company"), we
have participated in the preparation of the Registration Statement (No.
33-____________) filed on Form S-1 under the Securities Act of 1933, as amended,
relating to the offering of up to ___________ shares (the "Shares") of the
Company's common stock, par value $0.0001 per share (the "Common Stock"),
including ________ Shares of Common Stock which make up the Over-allotment
Option. We have also examined the proceedings taken and the instruments executed
in connection with the issuance of the Shares.
It is our opinion that, the Shares, when issued as contemplated by the
Registration Statement, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement.
Very truly yours,
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into between
International Meta Systems, Inc. (the "Company"), and Dr. Lee W. Hoevel
("Employee"), effective as of the 3rd day of February, 1997 (the "Effective
Date"), with reference to the following facts:
RECITALS
A. The Company is engaged primarily in the business of developing
microprocessor chips, including the Meta 6000 Chip (the "Meta 6000 Chip"). The
Company's operations are located in El Segundo, California and Austin, Texas;
B. Employee has served as a consultant to the Company and is familiar
with the Company and its efforts to develop the Meta 6000 Chip;
C. The Company has entered into a contract with a corporation (the
"Foundry Partner") dated April 27, 1995, as amended on April 3, 1996 (the
"Foundry Partner Contract"), pursuant to which the Foundry Partner has provided
financing to the Company to develop the Meta 6000 Chip and the Company has
agreed to meet certain development "milestones," including "tapeout" and
delivery of a completed Meta 6000 Chip acceptable to the Foundry Partner;
D. The Company wishes to incentivize Employee by providing him the
opportunity to receive shares of its common stock ("Common Stock") in connection
with his employment; and
E. Employee wishes to be employed by the Company, and the Company wishes
to employ Employee, on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises, representations,
covenants and conditions set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. EMPLOYMENT.
The Company hereby employs Employee, and Employee hereby accepts such
employment, subject to the terms and conditions set forth herein.
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2. TERM.
The Company shall employ Employee, and Employee shall serve the Company for
a three year period beginning on the Effective Date, (the "Employment Period"),
subject to the provisions of Section 6 hereof.
3. TITLE, DUTIES AND RESPONSIBILITIES.
(a) DUTIES. Employee agrees to serve the Company and the Company agrees
to employ Employee in the capacity as president. Employee shall report to the
Company's chief executive officer. Subject to the direction and control of the
board of directors of the Company and its chief executive officer, Employee
shall perform all duties that may be required of him in his position as
president and all duties that are set forth in the Company Bylaws. It is
anticipated by Employee and the Company that during the first six months of his
employment, Employee's principal responsibility shall be overseeing the
implementation and development of the Meta 6000 Chip in accordance with the
tapeout and completion schedule mandated by the Foundry Partner Contract and the
Foundry Partner. Employee agrees to execute and fulfill all policies
established by the Company.
(b) OBLIGATIONS. The Company acknowledges that Employee has certain
existing private business interests and responsibilities. The Company and
Employee agree that these business interests will not interfere with Employee's
duties and responsibilities under this Agreement. Employee agrees that during
the term of this Agreement and prior to undertaking any new or additional
business activity, he will notify the chief executive officer of the Company of
the proposed activity. If the chief executive officer disapproves the proposed
activity because he concludes the activity would interfere with Employee's
duties as president, and Employee continues to engage in the activity after
receiving written notice of disapproval, then such activity shall be grounds for
terminating Employee's employment for cause under clause (B) of paragraph 6(b)
of this Agreement. Failure by the chief executive officer to signify his
disapproval within 30 business days of Employee's notification shall be deemed
approval. Nothing in this paragraph shall prohibit Employee from making
personal investments that will neither require his services nor conflict with
the interests of the Company.
(c) BOARD OF DIRECTORS. The Company will take all actions necessary to
elect Employee to its board of directors as promptly as possible.
4. PLACE OF PERFORMANCE.
Employee shall carry out his duties hereunder principally at the Company's
offices in Austin, Texas. The Company agrees to provide Employee living
quarters and a car in Austin, Texas until the earlier of August 1, 1997, or such
time as the Company and Employee agree that personal or business circumstances
require a change in this
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arrangement. At that time, the parties will review the situation to determine
what, if any, change may be necessary or appropriate.
5. COMPENSATION, OPTIONS AND BENEFITS.
(a) SALARY. As of the Effective Date, Employee's annual salary shall be
$130,000. Employee's salary shall be reviewed by the Company annually on each
anniversary date of this Agreement during the Employment Period. Employee's
annual salary shall be payable in installments in accordance with the Company's
normal salary payment policies applicable to executives of the Company, and
shall be subject to such payroll deductions as required by law or as appropriate
under the Company's payroll deduction procedures. The Company will send
Employee's paychecks to Employee at its Austin, Texas office or, at the election
of Employee, they will be directly deposited into Employee's bank.
(b) BONUS SHARES AND BONUS STOCK OPTIONS. Upon the occurrence of each
milestone event described below, Employee shall: (i) receive 12,500 shares of
unregistered and restricted Common Stock, and (ii) be granted an option issued
under the Company's 1996 Stock Option Plan (the "Plan") to acquire an additional
12,500 shares of Common Stock that have been registered under the Securities Act
of 1933 (the "Act"). This option shall be fully vested at the time of grant and
its exercise price shall be the Fair Market Value (as that term is defined by
the Plan) of the Common Stock on the date of grant. Employee agrees that as a
condition of his receipt of any options or shares of Common Stock under this
Agreement, he shall execute all investment representation letters and all other
documents reasonably required by the Company to comply with applicable federal
and state securities laws in connection with the issuance of any such options or
shares and Employee shall permit appropriate legends, as required, to be affixed
to the certificates representing such shares. The milestone events are:
(1) The "tapeout" of a Meta 6000 "test" Chip by a date agreed to
by the Company's Foundry Partner and payment to the Company of 50% of
the milestone payment called for at tapeout by Article 5 of the
Foundry Partner Contract.
(2) Acceptance of a Meta 6000 "test" Chip by the Foundry Partner
and receipt by the Company of the remaining 50% of the milestone
payment called for by Article 5 of the Foundry Partner Contract upon
such acceptance.
(3) Tapeout of a Meta 6000 "production" Chip on a schedule and
by a date to be determined later in conjunction with and acceptable to
the Foundry Partner.
(4) Acceptance of the final silicon Meta 6000 "production" Chip
by the Foundry-Partner.
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The Company agrees to provide Employee bonuses in amounts equal to the
exercise price of each vested option granted pursuant to this paragraph 5(b) at
the time he exercises such option, provided Employee provides the Company with
written notice of his intended exercise at least 10 business days prior to his
date of employment.
(c) STOCK OPTIONS. The Company shall grant to Employee options to
purchase 300,000 shares of Common Stock under the Plan which have been
registered with the Securities and Exchange Commission pursuant to the Company's
Form S-8 Registration Statement (the "Plan Options") and options to purchase an
additional 300,000 shares of Common Stock that will not be issued under the Plan
or registered under the Company's S-8 Registration Statement (the "Non-Plan
Options"). The Plan Options and the Non-Plan Options are sometimes collectively
referred to hereafter as the "Section 5 Options". The grant date of the Section
5 Options shall be February 10, 1997. One third of the Plan Options (100,000
shares) and one third of the Non-Plan Options (100,000 shares) shall vest on
each of the first, second and third anniversary dates of this Agreement
(February 3, 1998, February 3, 1999, and February 3, 2000), subject to Employee
being employed hereunder on each such vesting date and subject to the provisions
of subparagraph 6(e)(ii) hereof. The option exercise price for the Section 5
Options shall be the "Fair Market Value" of the Common Stock on the grant date,
as that term is defined by the Plan, which was $1.29 per share. The Plan
Options shall all be incentive stock options, up to the maximum number of
incentive stock options that may be granted to an employee during any calendar
year under the Plan. The balance of the 300,000 Plan Options shall be
non-qualified stock options.
(d) OPTION AGREEMENTS. The Company and Employee shall enter into option
agreements for all options that are to be granted hereunder promptly following
the date each such option is granted.
(e) BENEFIT PROGRAMS. Employee and his dependents shall be entitled to
fully participate in the Company's medical, dental and disability Plans at the
earliest enrollment date and to participate in the Company's 401(k) program at
the next enrollment opportunity. In addition, Employee shall be entitled to any
other benefits provided to professional employees of the Company.
(f) REIMBURSABLE EXPENSES. The Company shall reimburse Employee for all
business travel and other out-of-pocket expenses reasonably incurred by Employee
in the performance of his duties pursuant to this Agreement. All reimbursable
expenses shall be appropriately documented in reasonable detail by Employee upon
submission of any request for reimbursement, and in a format and manner
consistent with the Company's expense reporting policy at the time such expenses
are incurred.
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6. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. The Employee's employment shall terminate
automatically upon Employee's death during the Employment Period. The Company
shall be entitled to terminate the Employee's employment because of his
Disability during the Employment Period. The term "Disability" means that
Employee is unable, for a period of 90 consecutive days, to perform his duties
under this Agreement as a result of physical or mental illness or injury. A
termination of Employee's employment by the Company for Disability shall be
communicated to the Employee by written notice, and shall be effective on the
10th day after receipt of such notice by Employee.
(b) CAUSE. The Company may terminate Employee's employment during the
Employment Period for Cause by giving him written notice of its intention to do
so. "Cause" means (A) a willful material breach of this Agreement by Employee
that has not been cured within five days after Employee receives written notice
specifying such breach; (B) a determination by the board of directors of the
Company that Employee has unsatisfactorily performed his duties and obligations
hereunder; (C) dishonesty by Employee that adversely affects the Company; (D)
excessive use of alcohol or illegal drugs, illegal conduct or other misconduct
by Employee that interferes with the performance of his duties under this
Agreement; or (E) any other illegal conduct or willful misconduct by Employee
that could reasonably be expected to result in material damage to the business
or reputation of the Company.
(c) WITHOUT CAUSE. The Company may terminate Employee's employment during
the employment without Cause by delivering written notice of termination to
Employee which termination shall be effective as of the date specified in the
notice.
(d) FORCED RESIGNATION. If Employee resigns from the Company because the
Company substantially reduces his duties and responsibilities under this
Agreement or Employee has been required to move to any location other than Los
Angeles, California, San Jose, California, or Austin, Texas, then such
resignation shall be considered a "Forced Resignation". Employee shall provide
the Company written notice 30 days in advance of the date he intends to resign
as a result of a Forced Resignation. Any such notice shall be delivered to the
Company within 90 days of the action event that causes a Forced Resignation
under this paragraph. If the notice is not delivered within that 90 day period,
any prior actions by the Company relating to Employee's duties and
responsibilities and place of employment shall not qualify as events causing a
Forced Resignation hereunder.
(e) OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(i) SEVERANCE PAYMENT. If the Company terminates Employee's
employment during the Employment Period without Cause or his employment
terminates as a result of a Forced Resignation, Employee shall continue to
receive the salary provided for in Section 5(a) for a six-month period following
the effective date of termination of
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Employee's employment. If Employee's employment with the Company terminates for
any other reason, including death, Disability or his resignation (except for a
Forced Resignation), neither he nor his estate shall be entitled to receive any
further salary payments following the effective date of termination.
(ii) ACCELERATED VESTING OF CERTAIN STOCK OPTIONS. If Employee's
employment is term ted by the Company without Cause, or as a result of his death
or Disability, or as a result of his Forced Termination, certain of Employee's
unvested Section 5 Options shall vest on the termination date as follows: (A)
8,333.33 Plan Options and 8,333.33 Non-Plan Options shall vest for each full
month that Employee was employed by the Company during the year of the
Employment Period in which the termination occurs, plus (B) an additional 50,000
shares each of Plan Options and Non-Plan Options shall vest, representing
accelerated vesting for a six month period following the termination of this
Agreement. For example, if Company terminates Employee without Cause effective
August 2, 1998, after he has been employed for 18 months, Employee would have
vested 206,000 Plan Options and 200,000 Non-Plan Options. This number of
Options would consist of 100,000 Plan Options and 100,000 Non-Plan Options that
would have vested after his first full year of employment; an additional 50,000
Plan Options and 50,000 Non-Plan Options that would have accelerated vesting for
the six months he was employed during year two; plus an additional 50,000 Plan
Options and 50,000 Non-Plan Options that would have accelerated vesting with
respect to the additional six months period following his termination. If
Employee's employment terminates for any reason, other than specified in the
first sentence of this subparagraph, only those Section 5 Options that had
actually vested on the effective date of termination shall be vested.
(iii) EXERCISABILTY OF STOCK OPTIONS ON TERMINATION. Employee
shall be entitled to exercise all Options that are vested on the effective date
of the termination of his employment, including those vested pursuant to
subparagraph 6(d)(ii) above, as follows: (A) for a 6 month period following the
effective date of his termination because of death or Disability; (B) for a 30
day period following his termination of employment for any reason other than
death or Disability.
(f) POST-TERMINATION OBLIGATIONS OF EMPLOYEE. Employee shall assist the
Company for a reasonable period in the orderly transition of all work under his
direction following the termination of his employment for any reason other than
cause or Disability.
7. NON-SOLICITATION OF EMPLOYEES.
(a) NON-SOLICITATION COVENANT. Employee recognizes and acknowledges that
the Company's technical and other personnel constitute a unique and invaluable
asset to the Company. Accordingly, while this Agreement is in effect and at all
times thereafter, Employee agrees he will not directly or indirectly solicit the
employment of any Company employees or provide any information or assistance to
others, including, without limitation, furnishing employee lists or names to any
other person or entity, in soliciting
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the employment of any Company employee. The requirements and covenants of this
Section 7 shall survive and continue after the termination of Employee's
employment with the Company.
(b) REMEDIES. Employee recognizes and agrees that violation or threatened
violation of any provision contained in this Section 7 will cause irreparable
damage or injury to the Company and that the Company's remedies at law for any
breach of this Section 7 may not be adequate, and the exact amount of the
Company's damages in the event of such breach would be impossible to ascertain.
Therefore, the Company shall be entitled, as a matter of right, without further
notice and without the necessity of posting bond thereof, to injunctive and
other equity relief restraining any threatened or further violation of this
Section. The Company's right to an injunction shall be in addition to, and not
in limitation of, any and other rights and remedies it may have against
Employee, including, but not limited to, the recovery of damages.
8. PROTECTION OF TRADE SECRETS AND CONFIDENTIAL INFORMATION.
(a) COVENANTS AND OBLIGATIONS REGARDING TRADE SECRETS. Employee
recognizes and acknowledges that by virtue of his employment with the Company,
he will have access to certain trade secret and confidential information of the
Company relating to the Meta 6000 Chip and other matters and that such
information constitutes valuable, special and unique property of the Company and
derives economic value because it is not generally known to the public or to
others who could benefit from its disclosure or use ("the trade secrets"). The
term "trade secrets" includes, but is not limited to, the following: (a)
technical information, such as formulae, know-how, computer programs, software,
secret processes or machines, inventions and research projects, documentation,
or other methods or processes; (b) business information relating to proposals,
bids, costs, profits, sales, markets, suppliers, plans for further development,
market studies or research projects; (c) the identity of the Company's Foundry
Partner and the Company's customers and prospective customers; (d) client
information such as customer lists and other information concerning particular
needs of the Company's clients; (e) price information, such as price lists, the
contents of bids, and other information concerning costs or profits; (f) the
names of the Company's employees, consultants and independent contractors, or a
compilation of data concerning the Company's employees, consultants and
independent contractors; and (g) any other information valuable because of its
private or confidential nature. Employee agrees that he will not reproduce,
copy or disclose the Company's trade secret and confidential business
information to any person, firm, corporation, association or other entity for
any reason or purposes whatsoever, nor will Employee advise, discuss or in any
way assist any other person or firm (including customers or competitors of the
Company) in obtaining or learning about the Company's trade secrets. Employee
covenants and acknowledges that upon separation from employment with the
Company, he shall immediately surrender to the Company all of the Company's
trade secrets and any and all such documents, materials or other tangible items
pertaining to these trade secrets that he may possess and that such trade
secrets shall be and
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remain the sole property of the Company. Employee agrees that if he is in doubt
as to whether any information, material, or document is a trade secret or is
confidential, he will contact the chief executive officer of the Company before
disclosing or using such information for any purpose other than in furtherance
of Employee's duties as an employee of the Company. The requirements and
covenants of this Section 8 shall survive and continue after the termination of
Employee's employment with the Company.
(b) REMEDIES. Employee recognizes and agrees that violation or threatened
violation of any of the provisions contained in this Section 8 above will cause
irreparable damage or injury to the Company and that the Company's remedies at
law for any breach of this Section 8 may not be adequate, and the exact amount
of the Company's damages in the event of such breach would be impossible to
ascertain. Therefore, the Company shall be entitled, as a matter of right,
without further notice and without the necessity of posting bond therefor, to
injunctive and other equitable relief restraining any threatened or further
violation of this Section 8. Such rights to an injunction shall be in addition
to, and not in limitation of, any other rights and remedies the Company may have
against Employee, including, but not limited to, the recovery of damages.
9. INVENTIONS.
(a) DISCLOSURE AND OWNERSHIP. Employee hereby agrees to disclose promptly
and in writing to the Company or to any person designated by the Company, any
ideas, inventions, technology, discoveries, developments, works of authorship,
and improvements, patentable or unpatentable, copyrightable or uncopyrightable,
which, during the term of employment by the Company, Employee may conceive,
make, develop or work on, in whole or in part, solely or jointly with others,
whether or not reduced to a drawing, written description, documentation, model
or other tangible form, and which relate either to product, service, research or
development fields in which the Company or any of its affiliates is, at the
time, actively engaged or which relates to Employee's services performed
pursuant to this Agreement. Employee agrees that all such ideas, inventions,
works, improvements and discoveries shall forthwith and without further
consideration become and be the exclusive property of the Company and its
successors and assigns and Employee further agrees not to disclose such
information to others without the prior written consent of the Company, except
as required by his employment by the Company or by law.
(b) ADDITIONAL ASSISTANCE. Employee further agrees to assist the Company
in every proper way, including, without limitation, signing any and all papers,
authorizations, applications and assignments, making and keeping proper records,
and giving evidence and testimony (all entirely at the Company's expense), to
obtain and to maintain for the use and benefit of the Company, or its nominees,
patent, copyright or other protection for any and all such ideas, inventions,
works, improvements and discoveries in all countries. Employee shall not be
entitled to any additional compensation for any services he provides under this
Section 9.
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10. CHANGE IN CONTROL.
(a) VESTING OF OPTIONS. In the event of a Change in Control, Employee's
Section 5 Options shall vest as follows: (i) if a Change of Control occurs
during the first six months of the Employment Period, all Section 5 Options that
would otherwise vest on the first anniversary date of this Agreement shall vest
prior to the Change of Control; (ii) if a Change of Control occurs after the
sixth month and before the 13th month of the Employment Period, all Section 5
Options that would otherwise vest on the first anniversary date of this
Agreement plus one-half of the Section 5 Options that would vest on the second
anniversary date of this Agreement shall vest prior to the Change of Control;
(ii) if a Change of Control occurs in the second or third year of the Employment
Period, all of the then outstanding Section 5 Options shall vest prior to the
Change of Control. All Section 5 Options that vest on an accelerated basis
hereunder shall be deemed to vest ten business days prior to the Change of
Control date.
(b) DEFINITION OF CHANGE OF CONTROL. A "Change in Control" shall be
deemed to have occurred if (i) the Company shall merge or consolidate with any
other corporation and shall not be the surviving corporation, (ii) the Company
shall transfer all or substantially all of its assets to any other entity or
person, or (iii) any person other than Amerscan, Marty Albert, or any affiliate
thereof, acquires directly or indirectly the Beneficial Ownership (as defined in
Section 13(d) of the Securities Exchange Act of 1934, as amended) of any voting
security of the Company and such person is, directly or indirectly, the
Beneficial Owner of voting securities representing 50% or more of the
then-outstanding voting securities of the Company immediately after such
acquisition.
(c) NOTICE. The Company shall notify Employee in writing promptly upon
determining that a Change in Control is likely to occur.
11. NO PRIOR AGREEMENTS.
Employee hereby represents and warrants to the Company that his execution
of this Agreement and his employment by the Company and the performance of his
duties hereunder will not violate or breach any agreement with a former
employer, client or any other person or entity. Further, Employee agrees to
indemnify the Company for any claim, including, but not limited to, attorneys'
fees and expenses of investigation, by any such third party that such third
party may now or hereafter have against the Company based upon or arising out of
any non-competition agreement, invention or secrecy agreement between Employee
and such third party that was in existence as of the Effective Date of this
Agreement.
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12. ASSIGNMENT; BINDING EFFECT.
Employee understands that he has been selected for employment by the
Company on the basis of his personal qualifications, experience and skills.
Employee agrees, therefore, he cannot assign all or any portion of this
performance under this Agreement. Subject to the preceding two (2) sentences,
this Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties hereto and their respective heirs, legal representatives,
successors and assigns.
13. COMPLETE AGREEMENT.
This Agreement is not a promise of future employment. Employee has no oral
representations, understandings or agreements with the Company or any of its
officers, managers or representatives covering the same subject matter as this
Agreement. This written Agreement is the final, complete and exclusive
statement and expression of the agreement between the Company and Employee and
of all the terms of this Agreement, and it cannot be varied, contradicted or
supplemented by evidence of any prior or contemporaneous oral or written
agreements. This written Agreement may not be later modified except by a
further writing signed by a duly authorized officer of the Company and Employee,
and no term of this Agreement may be waived except by writing signed by the
party waiving the benefit of such term.
14. NOTICE.
Whenever any notice is required hereunder, it shall be given in writing
addressed as follows:
To the Company: International Meta Systems, Inc
100 Sepulveda Boulevard, Suite 601
El Segundo, California 90245
Attn: Chief Executive Officer
To Employee: Dr. Lee W. Hoevel
c/o International Meta Systems, Inc.
Austin Design Center
7718 Woodhollow Dr., Suite 150
Austin, Texas 78731
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All notices under this Agreement shall be in writing and shall be given by hand
delivery to the other party, by courier, such as Federal Express, or by
registered or certified mail, return receipt requested. Notice shall be deemed
given and effective three (3) days after the deposit in the U.S. mail, one day
after delivery by courier, or when actually received, whichever first occurs.
Either party may change the address for notice by notifying the other party of
such change in accordance with this Section 14.
15. SEVERABILITY HEADINGS.
If any portion of this Agreement is held invalid or inoperative, the other
portions of this Agreement shall be deemed valid and operative and, so far as is
reasonable and possible, effect shall be given to the intent manifested by the
portion held invalid or inoperative. The headings herein are for reference
purposes only and are not intended in any way to describe, interpret, define or
limit the extent or intent of the Agreement or of any part hereof.
16. ARBITRATION.
Any unresolved dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted in
accordance with the commercial rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to, detract
from, or modify any provision thereof nor to award punitive damages to any
injured party. A decision by the arbitrator (or a majority of the panel of
arbitrators, if more than a single arbitrator is conducting the arbitration)
shall be final and binding. Judgment may be entered on the arbitrators' award
in any court having jurisdiction. The expense of any arbitration proceeding
shall be borne by such party as determined by the arbitrator (or the majority of
the panel of arbitrators, if applicable). All arbitration proceedings shall be
held in Los Angeles, California.
17. GOVERNING LAW.
This Agreement shall in all respects be construed and governed by the laws
of the State of California.
18. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement, effective as
of the date written above.
COMPANY
INTERNATIONAL META SYSTEMS, INC.
By: /s/ George W. Smith
----------------------------------------------
Name: George W. Smith
Title: Chairman and Chief Executive Officer
EMPLOYEE
/s/ Dr. Lee W. Hoevel
-------------------------------------------------
Dr. Lee W. Hoevel
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STOCK PURCHASE AGREEMENT
by and between
INTERNATIONAL META SYSTEMS, INC.
a Delaware corporation
and
PARAGON LIMITED PARTNERSHIP
a Cayman Islands exempted limited partnership
Dated: January 26, 1996
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement"), is entered into as of
January 26, 1996, by and between INTERNATIONAL META SYSTEMS, INC., a Delaware
corporation ("IMS") and PARAGON LIMITED PARTNERSHIP, a Cayman Islands exempted
limited partnership ("Paragon").
PREMISES
WHEREAS, IMS desires to sell to Paragon and Paragon desires to purchase
2,000,000 shares (the "Shares") of the common stock, par value $0.0001 per share
(the "IMS Common Stock") of IMS, in consideration of $2,000,000, at a purchase
price of $1.00 per Share, subject to the terms and conditions of this Agreement;
and
WHEREAS, the parties intend and believe that it is in their best interests
to enter into this Agreement and the other agreements contemplated herein;
AGREEMENT
NOW, THEREFORE, on the stated premises and for and in consideration of
the mutual covenants and agreements hereinafter set forth and the mutual
benefits to the parties to be derived here from, it is hereby agreed as follows:
ARTICLE I
REPRESENTATIONS, COVENANTS AND WARRANTIES OF Paragon
As an inducement to, and to obtain the reliance of IMS, Paragon represents
and warrants as follows:
Section 1.1 ORGANIZATION. Paragon is an exempted limited partnership duly
organized, validly existing and in good standing under the laws of the Cayman
Islands and has the power and is duly authorized, qualified, franchised and
licensed under all applicable laws, regulations, ordinances and orders of public
authorities to own all of its properties and assets and to carry on its business
in all material respects as it is now being conducted, including qualification
to do business in the jurisdictions in which the character and location of the
assets owned by it or the nature of the business transacted by it requires
qualification, except where the failure to so qualify would not have a material
adverse effect upon the assets, business, properties or operations of Paragon.
The execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated by this Agreement in accordance with the terms
hereof will not, violate any provision of Paragon's Memorandum of Association or
Articles of Association. Paragon has the full power, authority and legal right
and has taken all action required by law, its Memorandum of Association or
Articles of Association and otherwise to consummate the transactions herein
contemplated.
<PAGE>
Section 1.2 BINDING OBLIGATION; NO DEFAULT. Paragon has duly taken all
action necessary to authorize the execution, delivery and performance of this
Agreement and the other instruments and agreements contemplated hereby. Such
execution, delivery and performance does not and will not, to the best of
Paragon's knowledge, constitute a default under or a violation of any agreement,
order, award, judgment, decree, statute, law, rule, regulation or any other
instrument to which Paragon is a party or by which Paragon or the property of
Paragon may be bound or may be subject. This Agreement constitutes the legal,
valid and binding obligation of Paragon, enforceable against Paragon in
accordance with its terms, except: (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditor's rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief, or
other equitable remedies, and (iii) to the extent the indemnification provisions
contained in Section 4.7 may be limited by applicable federal or state
securities laws.
Section 1.3 COMPLIANCE WITH OTHER INSTRUMENTS, ETC. Neither the execution
and delivery of this Agreement by Paragon nor compliance by Paragon with the
terms and conditions of this Agreement will: (a) require Paragon to obtain the
consent of any governmental agency; (b) constitute a material default under any
indenture, mortgage or deed of trust to which Paragon is a party or by which
Paragon or its properties may be subject; (c) cause the creation or imposition
of any lien, charge or encumbrance on any of its assets; or (d) breach any
statute or regulation of any governmental authority, domestic or foreign, or
will on the Initial Closing Date (as defined herein) and on the Subsequent
Closing Date (as defined herein) conflict with or result in a breach or any of
the terms or conditions of any judgment, order, injunction, decree or ruling of
any court or governmental authority, domestic or foreign, to which Paragon is
subject.
Section 1.4 CONSENTS. No consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority or any third party is required to be made or obtained by Paragon in
connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 1.5 ACCURACY OF INFORMATION FURNISHED. No representation or
warranty by Paragon contained in this Agreement or in respect of the
exhibits, schedules or documents delivered to IMS by Paragon and expressly
referred to herein, and no statement contained in any certificate furnished
or to be furnished by or on behalf of Paragon pursuant hereto, or in
connection with the transactions contemplated hereby, contains, or will
contain as of the date such representation or warranty is made or such
certificate is or will be furnished, and as of the Initial Closing Date
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and the Subsequent Closing Date, any untrue statement of a material fact, or
omits, or will omit to state as of the date such representation or warranty is
made or such certificate is or will be furnished, any material fact which is
necessary to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading. True and correct
copies of each agreement and other document referred to in the schedules hereto
have been furnished by Paragon to IMS.
Section 1.6 SECURITIES WARRANTIES. With respect to the Shares to be
delivered by IMS pursuant to the provisions of Section 3.1 (a) - (c) hereof,
Paragon hereby represents and warrants to IMS that:
(a) The Shares are being acquired for the account of and not with a view to
sale in connection with any distribution of the Shares;
(b) Paragon is acquiring the Shares hereunder without having received any
form of general solicitation or general advertising;
(c) Paragon believes it has received all of the information it considers
necessary or appropriate for deciding whether to purchase the IMS Common Stock.
Paragon further represents that it has had an opportunity to ask questions and
receive answers from IMS regarding the terms and conditions of the purchase and
sale of the IMS Common Stock and the business, properties, prospects and
financial condition of IMS. Without limiting the generality of the foregoing,
Paragon has had the opportunity to obtain and review IMS': (i) Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, (ii) Quarterly Reports on
Form 10-Q for the quarters ended March 31, June 30, and September 30, 1995,
(iii) Proxy Statement for IMS' 1995 Annual Meeting, and (iv) all Forms 8-K filed
with the Securities and Exchange Commission (the "Commission") since December
31, 1994, in each case as filed with the Commission. The foregoing, however,
does not limit or modify the representations and warranties of IMS in Article II
of this Agreement or the right of Paragon to rely thereon;
(d) Paragon acknowledges that it is able to fend for itself, can bear the
economic risk of its investment, and has such knowledge and experience in
financial or business matters that it is capable of evaluating the merits and
risks of the investment in the IMS Common Stock. Paragon also represents it has
not been organized for the purpose of acquiring the IMS Common Stock.
(e) Paragon understands and hereby acknowledges that the Shares will be
issued pursuant to an exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act") and the rules and
regulations of the Commission promulgated thereunder; that the Shares will be
restricted securities as defined in Rule 144(a)(3) promulgated under the
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Securities Act; in part, IMS' reliance upon such exemptions is based on the
representations and warranties made by Paragon in this Section 1.6;
(f) It is understood that the certificates evidencing the Shares may bear
one or all of the following legends: (i) These securities have not been
registered under the Securities Act of 1933, as amended. They may not be sold,
offered for sale, pledged or hypothecated in the absence of a registration
statement in effect with respect to the securities under the Securities Act or
an opinion of counsel satisfactory to the IMS that such registration is not
required or unless sold pursuant to Rule 144 of such Act;" and (ii) any legend
required by the laws of the State of California, including any legend required
by the California Department of Corporations and Sections 417 and 418 of the
California Corporations Code.
(g) Paragon hereby agrees that it will not sell, transfer, hypothecate,
pledge, assign or otherwise dispose of any of the Shares, except: (i) pursuant
to the terms of this Agreement and to a registration statement filed under the
provisions of the Securities Act; (ii) pursuant to a favorable no-action or
interpretive letter received from the Commission that such sale, transfer,
hypothecation, pledge, assignment or other disposition is exempt from the
registration requirements of the Securities Act; or (iii) provided Paragon
shall have notified IMS of the proposed disposition and shall have furnished IMS
with a detailed statement of the circumstances surrounding the proposed
disposition; and (iv) if reasonably requested by IMS, Paragon shall have
furnished IMS with an opinion of counsel, reasonably satisfactory to IMS that
such disposition will not require registration of such Shares under the
Securities Act. It is agreed that IMS will not require opinions of counsel for
transactions made pursuant to Rule 144 except in unusual circumstances;
(h) Paragon hereby acknowledges that: (i) the Shares referred to herein
are being acquired after adequate investigation of the business plan and
prospects of IMS; (ii) Paragon is not relying upon the accuracy of any
predictions as to the future prospects or developments of IMS or its business
and is well informed as to the business of IMS and has reviewed its operations
and financial statements; and (iii) Paragon specifically acknowledges that the
Shares are speculative and involve a very high degree of risk and that there can
be no assurance that IMS will achieve its business objectives or, in particular,
that it will ever have cash available for distribution to its stockholders; and
(j) Paragon is an "accredited investor" as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act.
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ARTICLE II
REPRESENTATIONS, COVENANTS AND WARRANTIES
OF IMS
As an inducement to, and to obtain the reliance of Paragon, IMS represents
and warrants as follows:
Section 2.1 ORGANIZATION. IMS is a corporation duly organized, validly
existing and in good standing under the laws of the state of Delaware and has
the corporate power and is duly authorized, qualified, franchised and licensed
under all applicable laws, regulations, ordinances and orders of public
authorities to own all of its properties and assets and to carry on its business
in all material respects as it is now being conducted, and as it is proposed to
be conducted, including qualification to do business as a foreign corporation in
the states in which the character and location of the assets owned by it or the
nature of the business transacted by it requires qualification, except where the
failure to so qualify would not have a material adverse effect upon the assets,
business, properties or operations of IMS. The execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated by
this Agreement in accordance with the terms hereof will not, violate any
provision of IMS' certificate of incorporation or bylaws. IMS has taken all
action required by law, its certificate of incorporation, its bylaws or
otherwise to authorize the execution and delivery of this Agreement. IMS has
full power, authority and legal right and has taken all action required by law,
its certificate of incorporation, bylaws or otherwise to consummate the
transactions herein contemplated.
Section 2.2 CAPITALIZATION. The authorized capitalization of IMS consists
of 50,000,000 shares of common stock, par value $0.0001 per share (the "IMS
Common Stock") and 1,000,000 shares of preferred stock, par value $0.0001 per
share (the "IMS Preferred Stock"). As of the Initial Closing Date, there are
26,958,848 shares of IMS Common Stock and 10,250 shares IMS Preferred Stock
(including 10,000 shares of Series A Preferred Stock and 250 shares of Series B
Preferred Stock) issued and outstanding. All issued and outstanding shares are
legally issued, fully paid and nonassessable and not issued in violation of the
preemptive rights or other rights of any person. Except for (A) the conversion
privileges of the Preferred Stock issued and outstanding, (B) the rights
provided in Section 4.1 of this Agreement, and (C) currently outstanding options
to purchase 2,090,000 shares of Common Stock granted to employees, directors
and consultants pursuant to the IMS 1993 Incentive Stock Option Plan and the IMS
1993 Nonqualified Stock Option Plan (collectively, the "Option Plans") and other
outstanding options and/or warrants currently outstanding to purchase 2,812,877
shares of Common Stock granted to others, all of which are set forth on Schedule
2.2 hereof, there are no outstanding options, warrants, rights (including
conversion or preemptive
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rights) or agreements for the purchase or acquisition from IMS of any shares of
its capital stock. In addition to the aforementioned options, IMS has reserved
an additional 1,795,000 shares of its Common Stock for purchase upon exercise of
options to be granted in the future under the Option Plans. IMS is not a party
or subject to any agreement or understanding, and, to the best of IMS'
knowledge, there is no agreement or understanding between any persons and/or
entities which affects or relates to the voting or giving of written consents
with respect to any security or by a director of IMS.
Section 2.3 SUBSIDIARIES. IMS does not have any subsidiaries and does not
own, beneficially or of record, any other corporation. Except as set forth in
Schedule 2.3, IMS is not a participant in any joint venture, partnership or
similar arrangement.
Section 2.4 BINDING OBLIGATION; NO DEFAULT. IMS has duly taken all action
necessary to authorize the execution, delivery and performance of this Agreement
and the other instruments and agreements contemplated hereby. Such execution,
delivery and performance does not and will not, to the best of IMS' knowledge,
constitute a default under or a violation of any agreement, order, award,
judgment, decree, statute, law, rule, regulation or any other instrument to
which IMS is a party or by which IMS or the property of IMS may be bound or may
be subject. This Agreement constitutes the legal, valid and binding obligation
of IMS, enforceable against IMS in accordance with its terms, except: (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditor's rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in Section 4.7 may be limited by
applicable federal or state securities laws.
Section 2.5 COMPLIANCE WITH OTHER INSTRUMENTS, ETC. Neither the execution
and delivery of this Agreement by IMS nor compliance by IMS with the terms and
conditions of this Agreement will: (a) require IMS to obtain the consent of any
governmental agency; (b) constitute a material default under any indenture,
mortgage or deed of trust to which IMS is a party or by which IMS or its
properties may be subject; (c) cause the creation or imposition of any lien,
charge or encumbrance on any of its assets; or (d) breach any statute or
regulation of any governmental authority, domestic or foreign, or will on the
Initial Closing Date and the Subsequent Closing Date, conflict with or result in
a breach or any of the terms or conditions of any judgment, order, injunction,
decree or ruling of any court or governmental authority, domestic or foreign, to
which IMS is subject.
Section 2.6 CONSENTS. No consent, approval or authorization of, or
declaration, filing or registration with, any governmental
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or regulatory authority or any third party is required to be made or obtained by
IMS in connection with the execution, delivery and performance of this Agreement
and the transactions contemplated hereby. The transactions contemplated by this
Agreement have been approved by the Board of Directors of IMS.
Section 2.7 BOOKS AND RECORDS. The books of account and other financial
records of IMS are complete and correct in all material aspects. The minute
books of IMS contain records of all meetings from the time of incorporation and
accurately reflect all other material corporate action of the stockholders,
directors and any committees of the Board of Directors of IMS.
Section 2.8 ACCURACY OF INFORMATION FURNISHED. No represent-ation or
warranty by IMS contained in this Agreement or in respect of the exhibits,
schedules or documents delivered to Paragon by IMS and expressly referred to
herein, and no statement contained in any certificate furnished or to be
furnished by or on behalf of IMS pursuant hereto, or in connection with the
transactions contemplated hereby, contains, or will contain as of the date such
representation or warranty is made or such certificate is or will be furnished,
and as of the Initial Closing Date and the Subsequent Closing Date, any untrue
statement of a material fact, or omits, or will omit to state as of the date
such representation or warranty is made or such certificate is or will be
furnished, any material fact which is necessary to make the statements contained
herein or therein, in light of the circumstances under which they were made, not
misleading. True and correct copies of each agreement and other document
referred to in the schedules hereto have been furnished, or made available to
Paragon.
Section 2.9 TITLE TO THE SHARES. Upon delivery to Paragon of the
certificates for the Shares described in Article III of this Agreement, Paragon
will receive good and marketable title to the Shares. All of the Shares shall
be received by Paragon as validly issued, fully paid and nonassessable, free and
clear of all pledges, liens, encumbrances, security interests, equities,
options, claims, charges, limitations on voting rights or rights to receive
dividends, or other restrictions of any kind (other than any generally imposed
by federal, corporate or territorial securities laws or as otherwise provided
for in this Agreement).
Section 2.10 OFFERING. Subject in part to the accuracy of Paragon's
representations set forth in Article I of this Agreement, the offer, sale and
issuance of the IMS Common Stock as contemplated by this Agreement are exempt
from the registration requirements of the Securities Act, and neither IMS nor
any authorized agent acting on its behalf will take any action hereafter that
would cause the loss of such exemption.
Section 2.11 COMPLIANCE WITH EXCHANGE ACT. As of the Initial Closing (as
defined herein), IMS shall be current in all filings
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required to be tendered to the Commission pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Schedule 2.11 attached hereto are
true, complete and correct copies of the following: (a) IMS' Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as filed with the
Commission, and (b) IMS' Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, June 30 and September 30, 1995, as filed with the Commission,
(c) IMS's Proxy Statement for its 1995 Annual Meeting of Stockholders, (d) all
Forms 8-K filed with the Commission since December 31, 1994, and (e) all other
reports or registration statements filed by IMS with the Commission since
September 30, 1995 (collectively, the "Commission Filings"). Since September
30, 1995, IMS has filed all reports, registration statements and other documents
required to be filed by it under the Exchange Act. The Commission Filings were
prepared in accordance and complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be.
None of such forms, reports and statements, including, without limitation, any
financial statements, exhibits and schedules included therein and documents
incorporated therein by reference, at the time filed, or declared or it became
effective, as the case may be, contained, or now contains, or at the Closing
Date will contain, an untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
Included in Schedule 2.11 attached hereto are true and correct copies of
IMS' audited financial statements, including IMS audited consolidated balance
sheets as of December 31, 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1992, 1993 and 1994 (the "IMS Audited Financial Statements"); and true and
correct copies of IMS' unaudited consolidated balance sheets as of September 30,
1995, and the related unaudited consolidated statements of operations and cash
flows for the nine (9) month periods ended September 30, 1994 and 1995 (the "IMS
Unaudited Financial Statements"). The IMS Audited Financial Statements, together
with the notes thereto, fairly present the financial position of IMS at December
31, 1994, and the consolidated results of the operations and the changes in
stockholders' equity and cash flows for IMS for the periods covered by the IMS
Audited Financial Statements and have been prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied with prior periods.
The IMS Unaudited Financial Statements fairly present the financial position of
IMS at September 30, 1995, and the consolidated results of the operations and
cash flows for IMS for the periods then ended and have been prepared in
accordance with GAAP consistently applied with prior periods. (The IMS Audited
Financial Statements and IMS Unaudited Financial Statements are collectively
referred to herein as the "IMS Financial Statements.")
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Except as set forth in the IMS Financial Statements, IMS has no material
liabilities, contingent or otherwise, other than: (i) liabilities incurred in
the ordinary course of business subsequent to September 30, 1995, and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under GAAP to be reflected in the IMS Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of IMS. Except as
disclosed in the IMS Financial Statements, IMS is not a guarantor or indemnitor
of any indebtedness of any other person, firm or corporation. IMS maintains and
will continue to maintain a standard system of accounting established and
administered in accordance with GAAP.
Section 2.12 CHANGES.
Since September 30, 1995, except as set forth on Schedule 2.12, there has
not been:
(a) any change in the assets, liabilities, financial condition or
operating results of IMS from that reflected in the IMS Financial Statements,
except changes in the ordinary course of business that have not been, in the
aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting the assets, properties, financial condition,
operating results, prospects or business of IMS (as such business is presently
conducted and as it is proposed to be conducted);
(c) any waiver by IMS of a valuable right or of a material debt owed to
it;
(d) any satisfaction or discharge of any lien, claim, encumbrance or
payment of any obligation by IMS, except in the ordinary course of business and
that is not material to the assets, properties, financial condition, operating
results or business of IMS (as such business is presently conducted and as it is
proposed to be conducted);
(e) any material change or amendment to a material contract or arrangement
by which IMS or any of its assets or properties is bound or subject;
(f) any material change in any compensation arrangement or agreement with
any employee;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any key officer of
IMS; and IMS, to the best of its knowledge, does not
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know of the impending resignation or termination of employment of any such
officer;
(i) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of IMS;
(j) any mortgage, pledge, transfer of a security interest in, or lien,
created by IMS, with respect to any of its material properties or assets, except
liens for taxes not yet due or payable;
(k) any loans or guarantees made by IMS to or for the benefit of its
employees, officers or directors, or any member of their immediate families,
other than travel advances and other advances made in the ordinary course of its
business;
(l) any declaration, setting aside or payment or other distribution in
respect of any of IMS' capital stock, or any direct or indirect redemption,
purchase or other acquisition of any of such stock by IMS;
(m) to the best of IMS' knowledge, any other event or condition of any
character that might materially and adversely affect the assets, properties,
financial condition, operating results or business or IMS (as such business is
presently conducted and as it is proposed to be conducted); or
(n) any agreement or commitment by IMS to do any of the things described
in this Section 2.12.
Section 2.13 IMS SCHEDULES. IMS shall cause the IMS Schedules and the
instruments to be delivered to Paragon hereunder to be updated after the date
hereof up to and including the Subsequent Closing Date.
Section 2.14 LITIGATION There is no action, suit, proceeding or
investigation pending or currently threatened against IMS that questions the
validity of this Agreement, or the right of IMS to enter into such Agreement, or
to consummate the transactions contemplated hereby, or that might result, either
individually or in the aggregate, in any material adverse changes in the assets,
condition, affairs or prospects of IMS, financially or otherwise, or any change
in the current equity ownership of IMS, nor is IMS aware that there is any basis
for the foregoing. The foregoing includes, without limitation, actions, suits,
proceedings or investigations pending or threatened (or any basis therefor known
to IMS) involving the prior employment of any of IMS employees, their use in
connection with IMS' business of any information or techniques allegedly
proprietary to any of their former employers, or their obligations under any
agreements with prior employers. There is no action, suit, proceeding or
investigation by IMS currently pending or that IMS intends to initiate.
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Section 2.15 EMPLOYEE INVENTION AND SECRECY AGREEMENTS. Each employee,
officer and consultant of IMS has executed an Employee Invention and Secrecy
Agreement in the form attached hereto as Schedule 2.15. IMS, after reasonable
investigation, is not aware that any of its employees, officers or consultants
are in violation thereof, and IMS will use its best efforts to prevent any such
violation.
Section 2.16 PATENTS AND TRADEMARKS. IMS has sufficient title and
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes which are necessary
for its business as now conducted and as proposed to be conducted without any
conflict with or infringement of the rights of others. Except as disclosed in
Schedules 2.3 and 2.16, there are no outstanding options, licenses, or
agreements of any kind relating to the foregoing, nor is IMS bound by or a party
to any options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information, proprietary rights and processes of any other person or entity.
IMS has not received any communications alleging that IMS has violated or, by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. IMS is not aware that any of
its employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of his or her best efforts to promote the interest of IMS or that would
conflict with IMS' business as proposed to be conducted. Neither the execution
nor delivery of this Agreement nor the carrying on of IMS' business by the
employees of IMS, nor the conduct of IMS' business as proposed, will, to the
best of IMS's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is obligated. IMS does
not believe it is or will be necessary to utilize any inventions of any of its
employees (or people it currently intends to hire) made prior to their
employment by IMS.
Section 2.17 AGREEMENT ACTION.
Except as disclosed in Section 2.11 and Schedule 2.17:
(a) Except as set forth in Schedule 2.17, there are no agreements,
understandings or proposed transactions between IMS and any of its officers,
directors, affiliates, or any affiliate thereof;
(b) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or
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decrees to which IMS is a party or by which it is bound that involve (i)
obligations (contingent or otherwise) of, or payments to IMS in excess of,
$5,000, or (ii) the license of any patent, copyright, trade secret or other
proprietary right to or from IMS, or (iii) provisions restricting or affecting
the development, manufacture or distribution of IMS' products or services, or
(iv) indemnification by IMS with respect to infringements of proprietary rights.
(c) IMS has not (i) declared or paid any dividend or authorized or made
any distribution upon or with respect to any class or series of its capital
stock, (ii) incurred any indebtedness for money borrowed or any other
liabilities individually in excess of $5,000 or, in the case of indebtedness
and/or liabilities individually less than $5,000, in excess of $25,000 in the
aggregate, (iii) made any loans or advances to any person, other than ordinary
advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of
any of its assets or rights, other than the sale of its inventory in the
ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person or entity (including persons or entities
IMS has reason to believe are affiliated therewith) shall be aggregated for the
purpose of meeting the individual minimum dollar amounts of such subsection.
(e) Except as otherwise disclosed to Paragon in writing, receipt of which
is acknowledged by Paragon, IMS has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of IMS with or into any such corporation
or corporations, (ii) with any corporation, partnership, association or other
business entity or any individual regarding the sale, conveyance or disposition
of all or substantially all of the assets of IMS or a transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of IMS is disposed of, or (iii) regarding any other form of acquisition,
liquidation, dissolution or winding up of IMS.
Section 2.18 MANUFACTURING AND MARKETING RIGHTS. Except as set forth in
Schedule 2.18, IMS has not granted rights to manufacture, produce, assemble,
license, market or sell its products to any other person and is not bound by any
agreement that affects IMS' exclusive right to develop, manufacture, assemble,
distribute, market or sell its products.
Section 2.19 REGISTRATION RIGHTS. Except as provided in Section 4.8 and
Schedule 2.19 hereof, IMS has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity which are
outstanding as of the date of this Agreement.
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Section 2.20 TITLE TO PROPERTY AND ASSETS. Except as disclosed in Schedule
2.20, IMS owns its property and assets free and clear of all mortgages, liens,
loans and encumbrances, except such encumbrances and liens that arise in the
ordinary course of business and do not materially impair IMS' ownership or use
of such property or assets. With respect to the property and assets it leases,
IMS is in compliance with such leases and, to the best of its knowledge, holds a
valid leasehold interest free of any liens, claims or encumbrances.
Section 2.21 EMPLOYEE BENEFIT PLANS. Except as set forth in Schedule 2.21,
IMS does not have any Employee Benefit Plan as defined in the Employee
Retirement Income Security Act of 1974.
Section 2.22 TAX RETURNS, PAYMENTS AND ELECTIONS. IMS has filed all tax
returns and reports as required by law. These returns and reports are true and
correct in all material respects. IMS has paid all taxes and other assessments
due, except those contested by it in good faith that are listed in the IMS
Schedules. The provision for taxes of IMS as shown in the IMS Financial
Statements is adequate for taxes due or accrued as of the date thereof. IMS has
not elected pursuant to the Internal Revenue Code of 1986, as amended (the
"Code"), to be treated as a Subchapter S Corporation or a collapsible
corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has
it made any other elections pursuant to the Code (other than elections that
relate solely to methods of accounting, depreciation or amortization) that would
have a material effect on IMS, its financial condition, its business as
presently conducted or proposed to be conducted or any of its properties or
material assets. IMS has never had any tax deficiency proposed or assessed
against it and has not executed any waiver of any statute of limitations on the
assessment or collection of any tax or governmental charge. None of IMS'
federal income tax returns and none of its state income or franchise tax or
sales or use tax returns has ever been audited by governmental authorities.
Since the date of the IMS Financial Statements, IMS has made adequate provisions
on its books of account for all taxes, assessments and governmental charges with
respect to its business, properties and operations for such period. IMS has
withheld or collected from each payment made to each of its employees, the
amount of all taxes (including, but not limited to, federal income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes)
required to be withheld or collected therefrom, and has paid the same to the
proper tax receiving officers or authorized depositories.
Section 2.23 INSURANCE. IMS has in full force and effect fire and casualty
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow it to replace any of its properties that might
be damaged or destroyed. IMS has in full force and effect term life insurance
payable to IMS, on the life of George W. Smith in the amount of $1,000,000.
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IMS has in full force and effect products liability and errors and omissions
insurance in amounts customary for companies similarly situated.
Section 2.24 LABOR AGREEMENTS AND ACTION. IMS is not bound by or subject
to (and none of its assets or properties is bound by or subject to) any written
or oral, expressed or implied, contract, commitment or arrangement with any
labor union, and no labor union has requested or, to the best of IMS' knowledge,
has sought to represent any of the employees, representatives or agents of IMS.
There is no strike or other labor dispute involving IMS pending or to the best
of IMS' knowledge, threatened, that could have a material adverse effect on the
assets, properties, financial conditions, operating results, or business of IMS
(as such business is presently conducted and as it is proposed to be conducted),
nor is IMS aware of any labor organization activity involving its employees.
IMS is not aware that any officer or key employee, or that any group of key
employees, intends to terminate their employment with IMS, nor does IMS have a
present intention to terminate the employment of any of the foregoing. The
employment of each officer and employee of IMS is terminable at the will of IMS.
To the best of its knowledge, IMS has complied in all material respects with all
applicable state and federal equal employment opportunity and other laws related
to employment.
Section 2.25 REAL PROPERTY HOLDING COMPANY. IMS is not a real property
holding company within the meaning of Section 897 of the Code.
ARTICLE III
SALE OF SECURITIES
Section 3.1 SALE OF SECURITIES; PAYMENT FOR AND ISSUANCE OF SHARES.
Subject to the terms and conditions of this Agreement: (a) IMS agrees to sell
and deliver to Paragon 2,000,000 Shares; and (b) Paragon agrees to deliver funds
to IMS in the amount of $2,000,000, at a purchase price of $1.00 per Share, as
follows:
(a) The parties acknowledge and agree that prior to the Initial Closing
Date, Paragon has delivered to IMS the amount of $500,000. At the Initial
Closing, which shall be on the date first above written, IMS shall issue and
deliver to Paragon 500,000 Shares of IMS Common Stock with respect to such
$500,000 payment, and that certain agreement between IMS and Dolphin
Interconnect Solutions, Inc., dated as of December 30, 1995, will be deemed
canceled and null and void;
(b) At the Initial Closing, Paragon shall deliver to IMS an additional
$500,000 and IMS shall issue and deliver to Paragon an additional 500,000 Shares
of IMS Common Stock; and
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(c) On or before February 15, 1996 (the "Subsequent Closing Date"),
Paragon shall deliver to IMS an additional $1,000,000 and IMS shall issue and
deliver to Paragon an additional 1,000,000 Shares of IMS Common Stock.
Section 3.2 AVAILABLE EXEMPTION. The parties agree that the issuance of
the Shares shall be a transaction not involving a public offering for the
purposes of Section 4(2) of the Securities Act. The parties acknowledge that
the Shares shall be "restricted securities" as such term is defined in Rule
144(a) (3) promulgated under the Securities Act.
Section 3.3 CLOSINGS. The initial closing ("Initial Closing") of the
transactions contemplated by this Agreement shall be as of the date first above
written ("Initial Closing Date"), unless a different date is mutually agreed to
in writing by the parties hereto. In addition to the Initial Closing, there
shall be an additional closing ("Subsequent Closing"), which shall occur on or
before February 15, 1996, related to the transactions contemplated by Section
3.1 (c) of this Agreement. For purposes of this Agreement, the Initial Closing
Date and the Subsequent Closing Date shall be collectively referenced herein as
the "Closing Date," and the Initial Closing and the Subsequent Closing shall be
collectively referenced herein as the "Closing."
Section 3.4 CLOSING EVENTS. At the Closing, each of the respective parties
hereto shall execute, acknowledge and deliver (or shall cause to be executed,
acknowledged and delivered) any and all certificates, opinions, financial
statements, schedules, agreements, resolutions, rulings or other instruments
required by this Agreement to be so delivered at or prior to the Closing,
together with such other items as may be reasonably requested by the parties
hereto and their respective legal counsel in order to effectuate or evidence the
transactions contemplated hereby. However, in no event shall the Closing occur
without the satisfaction or waiver of the conditions set forth in Articles 5 and
6 of this Agreement.
ARTICLE IV
SPECIAL COVENANTS
Section 4.1 RIGHT OF FIRST REFUSAL. (i) On or before April 15, 1996, in
the event that IMS shall have received: (i) $2,000,000 in payment for the
Shares; and (ii) the receipt of at least an additional $6,000,000 from the sale
of up to an additional 8,000,000 shares at $1.00 per share of IMS' Common Stock
pursuant to a private placement (the "Private Placement") to be conducted by
IMS, in connection with which Paragon Capital Management LLC ("Paragon Capital
Management") shall act as placement agent pursuant to a placement agent
agreement (the "Placement Agent Agreement"), a copy of which is attached hereto
as Schedule 4.1,
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Paragon shall have a right of first refusal to purchase or cause to be purchased
from IMS any securities of IMS which may be offered in a private placement
pursuant to an exemption from registration under the Securities Act on the same
terms and conditions as may be offered to any third party. In connection
therewith, IMS shall be required to give sixty (60) days' written notice to
Paragon of the general funding requirements of IMS, including (A) the number of
securities to be offered, and (B) the price and terms, if any, upon which it
proposes to offer such securities. In the event that IMS shall give notice to
Paragon of its BONA FIDE intention to conduct a private placement of IMS'
securities, Paragon shall have ten (10) days from a date commencing no earlier
than the ten (10) day period prior to the conclusion of such sixty (60) day
period to provide written notice to IMS of its exercise of the right of first
refusal to purchase or cause to be purchased all of the securities described in
the notice on the terms and conditions set forth in the notice and to deliver
all consideration and execute and deliver all documents required to complete
such transaction. If Paragon shall fail to give notice of its election to
exercise the right of first refusal in full with respect to the offer of the
securities set forth in the notice and shall fail to deliver all such
consideration and to execute and deliver all such documents within the required
period, such right of first refusal with respect to the securities offered in
the notice shall lapse.
Section 4.2 ACCESS TO PROPERTIES AND RECORDS. IMS shall afford to the
officers and authorized representatives of Paragon full access to the
properties, books and records of IMS, in order that Paragon may have full
opportunity to make such reasonable investigation as it shall desire to make of
the affairs of IMS, and IMS will furnish Paragon with such additional financial
and operating data and other information as to the business and properties of
IMS, as Paragon shall from time to time reasonably request.
Section 4.3 AVAILABILITY OF RULE 144. Each of the parties acknowledge that
the stock of IMS to be issued pursuant to this Agreement will be "restricted
securities," as that term is defined in Rule 144 promulgated pursuant to the
Securities Act. IMS is under no obligation, except as set forth in Section 4.8
hereof, to register such shares under the Securities Act. Notwithstanding the
foregoing, however, IMS will use its best efforts to: (a) make publicly
available on a regular basis not less than semi-annually, business and financial
information regarding IMS so as to make available to the stockholders of IMS the
provisions of Rule 144 pursuant to subparagraph (c)(1) thereof; (b) file with
the Commission in a timely manner all reports and other documents required of
IMS under the Securities Act and the Exchange Act and (c) within ten (10) days
of any written request of any stockholder of IMS, IMS will provide to such
stockholder (i) a written statement by IMS that it has complied with the
reporting requirements of Commission Rule 144 (at any time after ninety (90)
days
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after the effective date of the first registration statement filed by IMS), the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of IMS and
such other reports and documents so filed by IMS, and (iii) such other
information as may be reasonably requested by any stockholder regarding any rule
or regulation of the Commission which permits the selling of any such securities
without registration or pursuant to such form. The stockholders of IMS holding
restricted securities of IMS as of the date of this Agreement, and their
respective heirs, administrators, personal representatives, successors and
assigns, are intended third party beneficiaries of the provisions set forth
herein. The covenants set forth in this Section 4.3 shall survive the Closing
and the consummation of the transactions herein contemplated.
Section 4.4 INFORMATION FOR IMS REGISTRATION STATEMENT AND PUBLIC REPORTS.
Paragon shall furnish IMS with all information concerning Paragon, including all
financial statements, required for inclusion in any registration statement or
public report required to be filed by IMS pursuant to the Securities Act, the
Exchange Act or any other applicable federal or state law. Paragon represents
and warrants to IMS that, to the best of its knowledge and belief, all
information so furnished for either such registration statement or other public
release by IMS shall be true and correct in all material respects without
omission of any material fact required to make the information stated not
misleading.
Section 4.5 SPECIAL COVENANTS AND REPRESENTATIONS REGARDING THE SHARES. The
consummation of this Agreement and the transactions herein contemplated,
including the issuance of the Shares to Paragon as contemplated hereby,
constitutes the offer and sale of securities under the Securities Act, and
applicable state statutes. Such transaction shall be consummated in reliance on
exemptions from the registration and prospectus delivery requirements of such
statutes which depend, INTER ALIA, upon the circumstances under which Paragon
acquire such securities.
Section 4.6 THIRD PARTY CONSENTS. IMS and Paragon agree to cooperate with
each other in order to obtain any required third party consents to this
Agreement and the transactions herein and therein contemplated.
Section 4.7 INDEMNIFICATION.
In the event any Shares are included in a registration statement under
Section 4.8:
(a) To the extent permitted by law, IMS will indemnify and hold harmless
each holder of Shares ("Holder"), any underwriter (as
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defined in the Securities Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Securities Act or
the Exchange Act, against any losses, claims, damages, or liabilities (or
actions in respect thereof) arising out of or are based upon any of the
following statements, omissions or violations (collectively a "Violation"): (i)
any untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any Violation or alleged Violation by IMS of the Securities Act or the
Exchange Act; and IMS will pay to each such Holder, underwriter or controlling
person, as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the indemnity agreement contained
in this subsection 4.7(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of IMS (which consent shall not be unreasonably withheld),
nor shall IMS be liable in any such case for any such loss, claim, damage,
liability, or action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will indemnify and
hold harmless IMS, each of its directors or officers who has signed the
registration statement, each person, if any, who controls IMS within the meaning
of the Securities Act, any underwriter, any other Holder selling securities in
such registration statement and any controlling person of any such underwriter
or other Holder, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
Securities Act or the Exchange Act insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will pay, as incurred, any legal or other expenses
reasonably incurred by an person intended to be indemnified pursuant to this
subsection 4.7(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; PROVIDED, HOWEVER, that the indemnity
contained in this subsection 4.7(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided, that, in no event shall any indemnity
under
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this subsection 4.7(b) exceed the gross proceeds from the offering received by
such Holder.
(c) Promptly after receipt by an indemnified party under this Section 4.7
of notice of the commencement of any action (including any governmental action),
such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 4.7 deliver to the indemnifying party
a written notice of the commencement thereof and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed to assume
the defense thereof with counsel mutually satisfactory to the parties; PROVIDED,
HOWEVER, that an indemnified party (together with all other indemnified parties
which may be represented without conflict by one counsel) shall have the right
to retain one separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 4.7, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 4.7.
(d) If the indemnification provided for in this Section 4.7 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage or expense referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other hand in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into in connection with the
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underwritten public offering are in conflict with the foregoing provisions, the
provision in the underwriting agreement shall control.
(f) The obligations of IMS and Holders under this Section 4.7 shall
survive the completion of any offering of registrable securities in a
registration statement under Section 4.8, and otherwise.
Section 4.8 REGISTRATION RIGHTS.
4.8.1 DEMAND REGISTRATIONS. (a) GENERAL. (i) On or before April 15, 1996,
in the event that IMS shall have received: (A) $2,000,000 in payment for the
Shares; an (B) the receipt of at least an additional $2,000,000 from the sale of
up to and additional 8,000,000 shares pursuant to the Private Placement, then,
during the period commencing July 31, 1996 and terminating April 30, 1998 (the
"Demand Registration Period"), Paragon and the holders purchasing in the Private
Placement shall have the right, upon the written request of the holders of no
less than twenty-five percent (25%) of the aggregate of the Shares and the
shares of IMS Common Stock purchased pursuant to the Private Placement (the "PP
Shares"), that IMS effect two registrations of the Shares and the PP Shares
(collectively, the "Registerable Shares"), under and pursuant to the Securities
Act, owned by such holders and specifying the intended method of disposition
thereof. IMS shall give prompt written notice (in any event within ten (10)
business days after its receipt of notice of any exercise of a Demand
Registration) to the other holders of Registerable Shares of its intention to
effect such a registration and shall use its best efforts to include in such
registration all of the Registerable Shares with respect to which IMS receives
from any of such holders a written request for inclusion therein within fifteen
(15) days after the stockholder's receipt of IMS' notice, which request shall
specify the number of the Registerable Shares to be disposed of by the
requesting holder and the intended method of disposition thereof. All
registrations requested pursuant to this Section 4.8.1(a) are referred to herein
as "Demand Registrations."
(b) NUMBER OF DEMAND REGISTRATIONS. Subject to the provisions of
Section 4.8.1(a), the holders of the Registerable Shares shall be entitled,
collectively, to request two Demand Registration during the Demand Registration
Period. Transferees of the Registerable Shares, other than such persons who
shall have been issued the Registerable Shares pursuant to the terms of this
Agreement, shall have the right to participate in any such registration
statement and shall be entitled to exercise any of the rights provided for in
this Section 4.8.
(c) REGISTRATION OF OTHER SECURITIES. Whenever IMS shall effect a
Demand Registration pursuant to Section 4.8.1(a) in connection with an
underwritten offering by the Holders of the
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Registerable Shares, no securities other than the Registerable Shares shall be
included among the securities covered by such registration unless (i) the
managing underwriter of such offering shall have advised IMS in writing that the
inclusion of such other securities would not adversely affect such offering or
(ii) such holders of Registerable Shares to be registered therein shall have
consented in writing to the inclusion of such other securities.
(d) REGISTRATION STATEMENT FORM. Demand Registration shall be
effected as soon as practicable following receipt of the holder's written
request and shall be on such appropriate registration form of the Commission (i)
as shall be selected by IMS and shall be acceptable to the requesting holder and
(ii) as shall permit the disposition of such Registerable Shares in accordance
with the intended method or methods of disposition specified in the request for
such registration. IMS agrees to include in any such registration statement all
information that, in the opinion of counsel to the holder so requesting
registration, or counsel to IMS, is required to be included.
(e) PRIORITY ON DEMAND REGISTRATIONS. In the event that the managing
underwriters of a requested Demand Registration advises IMS in writing that in
their opinion the number of Registerable Shares proposed to be included in any
such registration exceeds the number of securities which can be sold in such
offering, IMS shall include in such registration only the number of Registerable
Shares (PRO RATA in accordance with the number of Registerable Shares requested
by each Holder to be included in such registration) which in the opinion of such
underwriters can be sold.
(f) PERMITTED INTERRUPTIONS. IMS may postpone (such postponement is
referred to herein as a "Permitted Interruption") for a reasonable period of
time (not to exceed ninety (90) days, which may not thereafter be extended) the
filing or the effectiveness of a registration statement for a Demand
Registration if, at the time it receives a request for such registration: (i)
IMS is engaged in any active program for repurchase of IMS Common Stock that is
registered under the Securities Act and furnishes an Officer's Certificate to
that effect, (ii) IMS is conducting or about to conduct an offering of IMS
Common Stock and IMS is advised by the investment banker engaged by IMS to
manage such offering that such offering would be affected adversely by the
registration so demanded and IMS furnishes an Officer's Certificate to that
effect, or (iii) the board of directors of IMS shall determine in good faith
that such offering will interfere with a pending or contemplated financing,
merger, acquisition, sale of assets, recapitalization or other similar corporate
action of IMS and IMS furnishes an Officer's Certificate to that effect;
PROVIDED, HOWEVER, that IMS may not utilize the right more than once in any
twelve (12) month period. After such Permitted Interruption IMS
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shall effect such registration as promptly as practicable without further
request unless such request has been withdrawn.
(g) SELECTION OF UNDERWRITERS. The holder of Registerable Shares
requesting registration shall have the right to select such investment banker(s)
as shall be reasonably acceptable to IMS to administer the offering for which a
Demand Registration is requested. Such holder(s) shall, in their sole
discretion, negotiate the terms of the underwriters' fees and expenses, the
underwriting discounts and commissions and the transfer taxes to be paid by such
holder.
4.8.2. PIGGYBACK REGISTRATIONS. (a) GENERAL. Whenever IMS proposes to
register any shares of IMS Common Stock under the Securities Act (other than a
registrations on Exchange Act Form 10 or solely for shares to be issued in
connection with any employee benefit plan or a merger, consolidation or other
business combination registered on Form S-4, or any successor form thereto) and
the registration form to be used may be used for the registration of
Registerable Shares (a "Piggyback Registration"), IMS shall give prompt written
notice (in any event within ten (10) business days after its receipt of notice
of any exercise of other registration rights) to the holder of Registerable
Shares of its intention to effect such a registration and shall use its best
efforts to include in such registration all of the Registerable Shares with
respect to which IMS receives from any of such holders a written request for
inclusion therein within fifteen (15) days after the stockholder's receipt of
IMS' notice, which request shall specify the number of the Registerable Shares
to be disposed of by the requesting holder and the intended method of
disposition thereof. If IMS elects, prior to effectiveness, not to proceed with
a primary registration of its Common Stock, it shall not be obligated to
register any Registerable Shares.
(b) PRIORITY ON PRIMARY REGISTRATION. If a Piggyback Registration is
an underwritten primary registration on behalf of IMS and the managing
underwriter(s) of such offering advise IMS in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can reasonably be sold in such offering, then IMS shall include in
such registration (i) first, the securities that IMS proposes to sell, (ii)
second, the Registerable Shares, along with the shares of IMS shareholders who
have rights to participate in such registration, which rights were in existence
prior to the date of this Agreement, which request to be included therein (PRO
RATA in accordance with the number of Registerable Shares, and other shares
having the right to participate in the registration, as are requested by each
holder to be included in such registration), and (iii) third, other securities
requested to be included in such registration. If the managing underwriter of
such offering subsequently advises IMS in writing that the number of securities
which can be sold exceeds the number of securities included in the offering, IMS
shall include in
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the registration, first, the securities that IMS proposes to sell and second,
such Registerable Shares that the holder(s) had originally requested be included
in the registration and third, such other securities originally proposed for
inclusion in such registration.
(c) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of IMS'
securities other than the holder(s) of Registerable Shares and the managing
underwriter(s) of such offering advise IMS in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can reasonably be sold in such offering, then IMS shall include in
such registration (i) first, if such registration is being made on behalf of
other stockholders of IMS exercising demand registration rights, then the
securities so requested to be included therein in accordance with such demand
registration rights, (ii) second, the Registerable Shares requested to be
included in such registration (PRO RATA in accordance with the number of
Registerable Shares requested by each holder to be included in such
registration) and (iii) third, other securities requested to be included in such
registration. If the managing underwriter of such offering subsequently advises
IMS in writing that the number of securities which can be sold exceeds the
number of securities included in the offering, IMS shall include in the
registration such additional securities that (i) first, the holder(s) of
Registerable Shares had originally requested be included in the registration and
(ii) second, others had originally proposed to include in the registration.
(d) OTHER REGISTRATION. If: (i) IMS has previously filed a
registration statement with respect to any Registerable Shares pursuant to
Section 4.8.1(a) or 4.8.2(b) and (ii) such previous registration has not been
withdrawn or abandoned, IMS shall not file or cause to be effective any other
registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Form S-8 or S-4 or any successor form), whether on its own behalf
or at the request of any holder of such securities, until a period of at least
three (3) months has elapsed from the effective date of such previous
registration.
(e) PIGGYBACK NOT A DEMAND REGISTRATION. Should a holder's
participation in a registration be pursuant to a Piggyback Registration in
connection with: (i) an underwritten primary registration on behalf of IMS as
described in Section 4.8.2(b) or (ii) an underwritten secondary registration on
behalf of holders of IMS securities other than holder(s) of Registerable Shares
as described in Section 4.8.2(c), then such participation shall not constitute a
Demand Registration for purposes of determining the number of Demand
Registrations to which holders of Registerable Shares are entitled to pursuant
Section 4.8.1(b).
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4.8.3. EXPENSES OF DEMAND REGISTRATION. (a) All expenses allocable to the
registration of securities of the holder(s) to be registered pursuant to a
Demand Registration, other than underwriting discounts and commissions incurred
in connection with registrations, filings or qualifications pursuant to a Demand
Registration, including (without limitation) all registration, filing and
qualification fees, printer's and accounting fees, fees and disbursements of
counsel for IMS shall be borne equally and on a current basis by IMS and the
holders of the Registerable Shares; PROVIDED, HOWEVER, that IMS shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to a Demand Registration if the registration request is subsequently withdrawn
at the request of the holders of a majority of the Registerable Shares to be
registered (in which case all participating holders shall bear such expenses),
unless the holders of a majority of the Registerable Shares agree to forfeit
their right to one demand registration pursuant to a Demand Registration;
PROVIDED, FURTHER, HOWEVER, that if at the time of such withdrawal, the Holders
have learned of a material adverse change in the condition, business, or
prospects of IMS from that known to the holders at the time of their request and
have withdrawn the request with reasonable promptness following disclosure by
IMS of such material adverse change, then the Holders shall not be required to
pay any of such expenses and shall retain their rights pursuant to a Demand
Registration.
(b) PAYMENT OF EXPENSES BY THE HOLDER(S). In addition to the expenses
referenced in subsection 4.8.3 (a), the Holder(s) shall pay the underwriters'
fees and expenses, the underwriters' discount and commission and the commissions
and fees, if any, payable in respect of selling brokers, dealer managers or
similar securities industry professionals, fees and expenses of holder's
counsel, and transfer taxes allocable to the registration of the Holder(s)
securities so included in any Demand or Piggyback Registration pursuant to this
Agreement.
Section 4.8.4 EXPENSES OF PIGGYBACK REGISTRATION. IMS shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registerable Shares with respect to the registrations pursuant
to a Piggyback Registration for each Holder (which right may be assigned),
including (without limitation) all registration, filing, and qualification fees,
printers and accounting fees relating or apportionable thereto, but excluding
underwriter discounts and commissions relating to the Registerable Shares.
Section 4.8.5 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause IMS
to register Registerable Shares pursuant to this Section 4.8 may be assigned
(but only with all related obligations) by a Holder to a transferee or assignee
of such securities who, after such assignment or transfer, holds at least
500,000 shares of the Shares or the PP Shares (subject to appropriate adjustment
for
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stock splits, stock dividends, combinations and other recapitalization),
provided; (a) IMS is, within a reasonable time after such transfer, furnished
with written notice of the name and address of such transferee or assignee and
the securities with respect to which such registration rights are being
assigned; (b) such transferee or assignee agrees in writing to be bound by and
subject to the terms and conditions of this Agreement; and (c) such assignment
shall be effective only if immediately following such transfer the further
disposition of such securities by the transferee or assignee is restricted under
the Securities Act. For the purposes of determining the number of Registerable
Shares held by a transferee or assignee, the holdings of transferees and
assignees of a partnership who are partners or retired partners of such
partnership (including spouses and ancestors, lineal descendants and siblings of
such partners or spouses who acquire Registerable Shares by gift, will or
intestate succession) shall be aggregated together and with the partnership;
provided that all assignees and transferees who would not qualify individually
for assignment of registration rights shall have a single attorney-in-fact for
the purpose of exercising any rights, receiving notices or taking any action
under this Section 4.8.
Section 4.8.6 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, IMS shall not, without the prior written consent of
the holders of a majority of the outstanding Registerable Shares, enter into any
agreement with any holder or prospective holder of any securities of IMS which
would allow such holder or prospective holder (a) to include such securities in
any registration filed under Section 4.8 hereof, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the including of such securities will
not reduce the amount of the Registerable Shares of the holders which is
included, or (b) to make a demand registration which could result in such
registration statement being declared effective within one hundred twenty (120)
days of the effective date of any registration effected pursuant to a Demand
Registration by the holders.
Section 4.9 APPOINTMENT OF MEMBER OF BOARD OF DIRECTORS. On or before
April 15, 1996, in the event that IMS shall have received the $2,000,000
referenced in Sections 3.1 (a) - (c), Martin Albert, a director of Paragon
Capital Management, the sole general partner of Paragon, or his designee, shall
become a member of the Board of Directors of IMS. In the event that Mr. Albert,
or his designee, becomes a member of the Board of Directors of IMS pursuant to
this Section 4.9 and so long as Paragon continues to own at least 1,000,000
Shares, IMS will use its best efforts to elect a designee of Paragon to the IMS
Board of Directors. Such designee shall be reasonably acceptable to the Board
of Directors of IMS.
25
<PAGE>
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS
OF IMS
The obligations of IMS under this Agreement are subject to the
satisfaction, at or before the Closing Date, of the following conditions:
Section 5.1 ACCURACY OF REPRESENTATIONS. The representations and
warranties made by Paragon in this Agreement were true when made and shall be
true at the Closing Date with the same force and effect as if such
representations and warranties were made as of the date of this Agreement
(except for changes therein permitted by this Agreement), and Paragon shall have
performed or complied with all covenants and conditions required by this
Agreement to be performed or complied with by Paragon prior to or at the
Closing. IMS shall be furnished with a certificate, signed by a duly authorized
officer of Paragon and dated the Closing Date, to the foregoing effect.
Section 5.2 PAYMENT OF PURCHASE PRICE. Paragon shall have delivered the
purchase price specified in Section 3.1 (a) - (c).
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF Paragon
The obligations of Paragon under this Agreement are subject to the
satisfaction, at or before the Closing Date, of the following conditions:
Section 6.1 ACCURACY OF REPRESENTATIONS. The representations and
warranties made by IMS in this Agreement were true when made and shall be true
as of the Closing Date (except for changes therein permitted by this Agreement)
with the same force and effect as if such representations and warranties were
made at and as of the date of this Agreement, and IMS shall have performed and
complied with all covenants and conditions required by this Agreement to be
performed or complied with by IMS prior to or at the Closing. Paragon shall have
been furnished with a certificate, signed by a duly authorized executive officer
of IMS and dated the Closing Date, to the foregoing effect.
Section 6.2 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Paragon, and Paragon shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request.
26
<PAGE>
Section 6.3 EMPLOYEE INVENTIONS AND SECRECY AGREEMENTS. Each employee of
and consultant to IMS shall have entered into a Employee Inventions and Secrecy
Agreement in the form previously provided to Paragon.
Section 6.4 BYLAWS. The Bylaws of IMS shall provide that the Board of
Directors of IMS shall consist of at least three (3) and no more than eleven
(11) persons.
Section 6.5 BOARD OF DIRECTORS. The directors of IMS shall be Messrs.
George W. Smith, Richard A. Hahn, Masahiro Tsuchiya, Frank LaChapelle and
Sigmund Hartmann, and there shall be one (1) vacancy on the Board of Directors.
Section 6.6 OPINION OF IMS COUNSEL. Paragon shall have received from
Matthias & Berg counsel for IMS, an opinion, dated as of the Initial Closing
Date, in the form attached hereto as Schedule 6.6.
ARTICLE VII
MISCELLANEOUS
Section 7.1 LAW, FORUM AND JURISDICTION. This agreement shall be construed
and interpreted in accordance with the laws of the state of Delaware. The
parties agree that any dispute arising under this Agreement, whether during the
term of the Agreement or at any subsequent time, shall be resolved exclusively
in the courts of the state of California in the County of Los Angeles,
California, and the parties hereby submit to the jurisdiction of such courts for
all purposes provided herein and appoint the Secretary of State of the state of
California as agent for service of process for all purposes provided herein.
Section 7.2 NOTICES. Any notices or other communications required or
permitted hereunder shall be sufficiently given if personally delivered to its
or sent by overnight mail, registered mail or certified mail, postage prepaid,
or by prepaid telegram, or when telecopied and followed by confirmation copy
hand-delivered or sent by first class mail, addressed as follows:
If to IMS, to: International Meta Systems, Inc.
George W. Smith, President
100 North Sepulveda Boulevard
Sixth Floor
El Segundo, California 90245
(310) 524-9303 (Telecopier No.)
27
<PAGE>
With copies to: Matthias & Berg
Attorneys at Law
515 South Flower Street, Suite 700
Los Angeles, California 90071
Attn: Jeffrey P. Berg, Esq.
(213) 895-4058 (Telecopier No.)
If to Paragon, to: Paragon Limited Partnership
Ugland House
Georgetown, Grand Cayman
British West Indies
With copies to: Brobeck Phleger & Harrison
2 Embarcadero Place
2200 Geng Road
Palo Alto, California 94303
Attn: Thomas Kellerman, Esq.
(415) 496-2885 (fax)
or such other addresses as shall be furnished in writing by any party in the
manner for giving notices hereunder, and any such notice or communication shall
be deemed to have been given as of the date so delivered, mailed or telegraphed
or three (3) days after deposit with the United States Post Office.
Section 7.3 ATTORNEYS' FEES. In the event that any party institutes any
action or suit to enforce this Agreement or to secure relief from any default
hereunder or breach hereof, the breaching party or parties shall reimburse the
non-breaching party or parties for all costs, including reasonable attorneys'
fees, incurred in connection therewith and in enforcing or collecting any
judgment rendered therein.
Section 7.4 SCHEDULES; KNOWLEDGE. Each party is presumed to have full
knowledge of all information set forth in the other party's schedules delivered
pursuant to this Agreement.
Section 7.5 THIRD PARTY BENEFICIARIES. This contract is solely among IMS
and Paragon and, except for Sections 4.7 and 4.8 and as otherwise as
specifically provided, no director, officer, stockholder, employee, agent,
independent contractor or any other person or entity shall be deemed to be a
third party beneficiary of this Agreement.
Section 7.6 ENTIRE AGREEMENT. This Agreement represents the entire
agreement between the parties relating to the subject matter hereof. This
Agreement alone fully and completely expresses the agreement of the parties
relating to the subject matter hereof. There are no other courses of dealing,
understandings, agreements, representations or warranties, written or oral,
except as set forth herein. This Agreement may not be amended or modified,
except by a written agreement signed by all parties hereto.
28
<PAGE>
Section 7.7 SURVIVAL; TERMINATION. The representations, warranties and
covenants of the respective parties shall survive the Closing Date of the
consummation of the transactions herein contemplated.
Section 7.8 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.
Section 7.9 AMENDMENT OR WAIVER. Every right and remedy provided herein
shall be cumulative with every other right and remedy, whether conferred herein,
at law, or in equity, and may be enforced concurrently herewith, and no waiver
by any party of the performance of any obligation by the other shall be
construed as a waiver of the same or any other default then, theretofore, or
thereafter occurring or existing. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of IMS and the holders of a majority of the Shares issued
hereunder. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each holder of any Shares purchased under this Agreement
at the time outstanding, each future holder of all such Shares, and IMS.
Section 7.10 INCORPORATION OF RECITALS. All of the recitals hereof are
incorporated by this reference and are made a part hereof as though set forth at
length herein.
Section 7.11 EXPENSES. Each of the parties to this Agreement shall bear all
of its own expenses incurred by it in connection with the negotiation of this
Agreement and in the consummation of the transactions provided for herein and
the preparation therefor.
Section 7.12 HEADINGS; CONTEXT. The headings of the sections and
paragraphs contained in this Agreement are for convenience of reference only and
do not form a part hereof and in no way modify, interpret or construe the
meaning of this Agreement.
Section 7.13 SUCCESSOR AND ASSIGNS. Except as otherwise provided herein,
the terms and conditions of this Agreement shall insure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Shares). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
Section 7.14 PUBLIC ANNOUNCEMENTS. Except as may be required by law,
neither party shall make any public announcement or filing
29
<PAGE>
with respect to the transactions provided for herein without the prior consent
of the other party hereto.
Section 7.15 SEVERABILITY. In the event that any particular provision or
provisions of this Agreement or the other agreements contained herein shall for
any reason hereafter be determined to be unenforceable, or in violation of any
law, governmental order or regulation, such unenforceability or violation shall
not affect the remaining provisions of such agreements, which shall continue in
full force and effect and be binding upon the respective parties hereto.
Section 7.16 FAILURE OF CONDITIONS; TERMINATION. In the event any of the
conditions specified in this Agreement shall not be fulfilled on or before the
Closing Date, either of the parties shall have the right either to proceed or,
upon prompt written notice to the other, to terminate and rescind this Agreement
without liability to any other party. The election to proceed shall not affect
the right of such electing party reasonably to require the other party to
continue to use its efforts to fulfill the unmet conditions.
Section 7.17 NO STRICT CONSTRUCTION. The language of this Agreement shall
be construed as a whole, according to its fair meaning and intendment, and not
strictly for or against either party hereto, regardless of who drafted or was
principally responsible for drafting the Agreement or terms or conditions
hereof.
Section 7.18 EXECUTION KNOWING AND VOLUNTARY. In executing this Agreement,
the parties severally acknowledge and represent that each: (a) has fully and
carefully read and considered this Agreement; (b) has been or has had the
opportunity to be fully apprised of its attorneys of the legal effect and
meaning of this document and all terms and conditions hereof; (c) has been
afforded the opportunity to negotiate as to any and all terms hereof; and (d) is
executing this Agreement voluntarily, free from any influence, coercion or
duress of any kind.
30
<PAGE>
IN WITNESS WHEREOF, the corporate parties hereto have caused this Agreement
to be executed by their respective officers, hereunto duly authorized, and
entered into and closed as of the date first above written at Los Angeles,
California.
("IMS")
INTERNATIONAL META SYSTEMS, INC.
By:/s/ George W. Smith
--------------------------------
George W. Smith
President
("Paragon")
PARAGON LIMITED PARTNERSHIP
By: Paragon Capital Management LLC,
Its: General Partner
By:/s/ Martin S. Albert
--------------------------------
Martin S. Albert
Director
31
<PAGE>
The Company does not have any subsidiaries.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 21, 1997, accompanying the financial
statements of International Meta Systems, Inc. contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 27, 1997
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
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<SECURITIES> 4,448,484 533,437
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<CURRENT-ASSETS> 4,586,090 614,327
<PP&E> 1,341,880 1,688,866
<DEPRECIATION> 624,757 740,610
<TOTAL-ASSETS> 5,401,920 1,714,093
<CURRENT-LIABILITIES> 465,247 1,098,392
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2 1
0 0
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<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (4,060) 0
<INCOME-PRETAX> (7,134,779) (4,672,728)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,134,779) (4,672,728)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,134,779) (4,672,728)
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