<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1996
REGISTRATION NO. 333-09295
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
TELESENSORY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
CALIFORNIA 3698 77-0208927
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
--------------
455 NORTH BERNARDO AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(415) 960-0920
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
LARRY ISRAEL
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
TELESENSORY CORPORATION
455 NORTH BERNARDO AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(415) 960-0920
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
--------------
COPIES TO:
MARIO M. ROSATI EDWARD M. LEONARD
MICHAEL J. DANAHER BROBECK, PHLEGER & HARRISON LLP
WILSON SONSINI GOODRICH & ROSATI TWO EMBARCADERO PLACE
PROFESSIONAL CORPORATION 2200 GENG ROAD
650 PAGE MILL ROAD PALO ALTO, CA 94303
PALO ALTO, CA 94304 (415) 424-0160
(415) 493-9300
--------------
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 or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 6, 1996
PROSPECTUS
2,900,000 SHARES
LOGO
COMMON STOCK
-----------
Of the 2,900,000 shares of common stock, $.02 par value (the "Common Stock"),
offered hereby (the "Offering"), 2,275,000 shares are being sold by Telesensory
Corporation, a California corporation ("Telesensory" or the "Company"), and
625,000 shares are being sold by the Selling Shareholders. The Company will not
receive any of the proceeds from the sale of shares by the Selling
Shareholders. See "Principal and Selling Shareholders." Prior to this Offering,
there has been no public market for the Common Stock. It is currently
anticipated that the initial public offering price for the Common Stock will be
between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Company has applied to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol "TLSN."
-----------
SEE "RISK FACTORS," BEGINNING ON PAGE 7 HEREIN FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
-----------
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 PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS
--------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share......... $ $ $ $
Total (3)......... $ $ $ $
</TABLE>
- -------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $800,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
435,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. Of the shares
subject to this option, all 435,000 shares will be sold by the Company. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
-----------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if issued to and accepted by the Underwriters and subject to
approval of certain legal matters by counsel for the Underwriters. It is
expected that delivery of the Common Stock will be made against payment
therefor on or about , 1996, in New York, New York.
-----------
JEFFERIES & COMPANY, INC. VAN KASPER & COMPANY
, 1996
<PAGE>
Low Vision Products
READING VIEWING SMALL OBJECTS
Magnification and electronic Small objects, such as pill bottles,
enhancement provided by Aladdin(R) food packages, stamps, and coins can
video magnifiers permit severely be easily read when the image is
visually impaired people to read magnified and enhanced by a video
very small print. Books, newspapers, magnifier.
recipes, personal correspondence,
and photographs all become
accessible.
WRITING COMPUTER DISPLAY MAGNIFICATION
Writing becomes possible for Super Vista provides 2x-16x
visually impaired persons when they magnification of text and graphics
can see what they are writing. Here, displays for most PC-compatible
the Aladdin is being used to help software application programs. Here,
write a check. Super Vista is being used with
Microsoft Windows.
IN CONNECTION WITH THIS 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 TRANSACTIONS MAY BE
EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
Explanatory Note: The following language appears in both print and braille in
the printed prospectus.
Telesensory Corporation manufactures innovative electronic and computer-
based products to assist people with severe visual disabilities to achieve
greater independence and privacy. The Company's products for people with
severely impaired vision ("Low Vision Products") include the Aladdin family of
video magnifiers. The Company's products for blind people (the "Blindness
Products") include braille devices which allow blind people to use personal
computers.
This page is printed in braille, a pattern of raised dots which provides
blind people with a means of reading character information using their
fingertips. For this sheet, interpoint braille has been used, which saves
paper and space by embossing braille on both sides of the sheet. The
characters are "interpointed" so that the embossed dots on each side do not
interfere with each other.
The braille language was originally developed by Frenchman Louis Braille in
the late 19th century. It is adaptable for virtually any written language.
Many versions of braille are now used by blind people worldwide.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus, including information under "Risk Factors." Except as
otherwise noted, all information in this Prospectus, including financial
information, share and per share data, assumes (i) the issuance of 112,500
shares of Common Stock upon the net exercise of all outstanding warrants, and
(ii) no exercise of the Underwriters' over-allotment option. See
"Underwriting." This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in these forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those set forth in the Section entitled "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
Telesensory Corporation ("Telesensory" or the "Company"), founded in 1970,
develops, manufactures and markets innovative electronic and computer-based
products to assist people with severe visual disabilities to achieve greater
independence and privacy. The Company is the leading provider of such products
in North America, and one of the two leading companies worldwide. The Company
makes video magnifiers and other electronic and computer-based assistive
devices for people who are severely visually impaired (the "Low Vision
Products") and various braille-related and other electronic and computer-based
assistive devices for those who are totally blind or without useable light
perception (the "Blindness Products").
Severe visual impairment is defined by the National Center for Health
Statistics as the inability to read ordinary newspaper print even when wearing
glasses or contact lenses. Such people also have difficulty with daily
activities such as reading mail and prescription bottles, balancing checkbooks,
viewing photographs and working with small objects. The number of people in the
United States who are severely visually impaired is estimated at 4.3 million. A
much smaller population, estimated at 100,000 in the United States, is either
totally blind or lacks useable light perception. Populations in other developed
countries are believed to exhibit similar rates of visual impairment. Age-
related macular degeneration, which has no known cure, is the leading cause of
visual impairment and currently affects 20% of individuals over age 65. Other
leading causes of visual impairment and blindness include diabetes and
glaucoma.
Disabled people, including those who are visually disabled, are increasingly
seeking to participate fully in workplace, recreation and other daily
activities enjoyed by non-disabled people. There is also a growing awareness of
the need to enhance the quality of lives of disabled people. For example, the
Americans with Disabilities Act (the "ADA") mandates that public facilities and
services be accessible to disabled people, including those with visual
impairments. The Company believes that these trends, combined with an aging but
active population that desires to preserve its independence, have contributed
to a growing demand for devices to assist visually disabled people and the
development of a consumer market willing and able to purchase assistive devices
without government assistance. The Company believes that only a small
percentage of visually impaired people are familiar with or own electronic
assistive devices. For example, the Company estimates that annual unit sales of
all electronic and computer-based magnification systems in the United States
are made to fewer than 0.5% of the 4.3 million people who are severely visually
impaired.
Low Vision Products accounted for 71% of the Company's net revenue in 1995.
Low Vision Products consist of video magnifiers and computer screen
magnification systems, which provide adjustable magnification, enhanced
contrast and a larger field of view. In 1994, the Company introduced the
Aladdin, a highly innovative, advanced video magnifier. In 1995, the Aladdin
won the American Society of Aging's Gold Award for outstanding product design
for mature consumers. Primarily as a result of the introduction of the Aladdin,
unit sales of video magnifiers increased 53% in 1995 over the prior year, to
11,091 units, and increased 18% in the first half of 1996 as compared to the
first half of 1995. The Company believes that its sales of video magnifiers, in
both units and dollars, represented approximately 55% of the market in the
United States in 1995 and significantly exceeded comparable figures for any of
its competitors worldwide.
3
<PAGE>
Blindness Products accounted for 29% of the Company's net revenue in 1995.
The principal product line consists of refreshable computer-controlled braille
displays that enable blind persons to operate personal computers. Other
Blindness Products include optical character reading systems with synthesized
speech or braille output, and braille printers. The Company believes that it is
one of the top three manufacturers worldwide for the majority of its Blindness
Products.
Telesensory believes that it has the largest worldwide distributor and dealer
network of any company marketing assistive devices to severely visually
impaired people. For distribution of its Low Vision Products, the Company uses
a network of approximately 110 United States and 30 international distributors
and dealers. For distribution of its Blindness Products, the Company uses
approximately 37 United States and generally the same 30 international
distributors and dealers that distribute its Low Vision Products, as well as an
in-house sales team. International sales represented approximately 35% of total
sales in 1995. The Company and its distributors sell to government agencies,
institutions, schools, corporations and individuals. The Company estimates that
government funded purchases accounted for approximately 40% of domestic sales
and a higher percentage of international sales in 1995.
Since 1994, the Company has taken a number of steps to enhance net revenue
and profitability. These steps included the appointment of Larry Israel as
President and Chief Executive Officer in July 1994, the implementation of a
cost reduction program, the closure of the Company's manufacturing facility in
Ireland, the reorganization of the Company into two operating divisions, the
adoption of a continuous flow manufacturing process for its Low Vision Products
and the introduction of the Aladdin line of video magnifiers. The Company also
strengthened its international operations by acquiring its distributors in the
United Kingdom and France in March 1996. Pre-tax earnings have increased from a
loss of $1.3 million in 1993 to a profit of $2.3 million in 1995 and a profit
of $1.4 million for the first six months of 1996. See "Selected Consolidated
Financial Data."
The Company's goal is to be the market leader in the development,
manufacture, and marketing of electronic and computer-based assistive devices
for visually impaired individuals. To achieve this goal, the Company is seeking
to: (i) increase consumer demand for electronic and computer-based assistive
devices by increasing consumer awareness of the Company's products and
expanding distribution channels, (ii) develop new products and enhance existing
products, (iii) continue to reduce manufacturing costs, (iv) develop new
markets and business opportunities through strategic alliances and acquisitions
both in the United States and internationally, and (v) develop new applications
for the Company's products.
The Company's principal executive offices are located at 455 North Bernardo
Avenue, Mountain View, California 94043, and its telephone number is (415) 960-
0920.
RISK FACTORS
In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 7 to 13 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investing in the Common Stock include the following factors: "Adverse Effect
on Price of Common Stock Due to Fluctuations in Operating Results;" "Failure to
Expand Consumer Market;" "Dependence on Development of New Products and Product
Enhancements;" "Highly Competitive Markets;" "Dependence on Limited Sources of
Supply;" "Risks Associated with Manufacturing;" "Dependence on International
Sales;" "Dependence on Independent Distributors;" "Dependence on Referral
Business;" "Dependence on Government Funding and Reimbursement;" "Risks
Associated with Acquisitions;" "Intellectual Property and Risk of Third Party
Claims of Infringement;" "Dependence on Key Personnel;" "Risks Associated with
Government Regulation of the Company's Products;" "Risks Associated with
Significant Growth;" "Ownership by Management and Affiliates;" "Anti-Takeover
Effects of Preferred Stock;" "No Prior Trading Market for Common Stock;
Potential Volatility of Stock Price;" "Shares Eligible for Future Sale; Lock-up
Agreements; Possible Adverse Effect on Future Market Price;" "Dilution;"
"Management Discretion Over Proceeds of the Offering;" and "No Dividends."
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company.......... 2,275,000 shares
Common Stock offered by the Selling
Shareholders................................ 625,000 shares
Common Stock to be outstanding after this
Offering.................................... 5,279,322 shares(1)
Use of Proceeds.............................. For repayment of bank indebtedness and
other general corporate purposes, including
working capital, marketing, product devel-
opment and possible acquisitions. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol....... TLSN
</TABLE>
- ----------
(1) Excludes 623,494 shares of Common Stock issuable upon the exercise of stock
options outstanding as of June 30, 1996, at a weighted average exercise
price of $2.98 per share. See "Management -- Stock and Employee Benefit
Plans," and Note 9 of Notes to Consolidated Financial Statements.
Aladdin(R), OsCaR(R), PowerBraille(TM), ScreenPower(R), Visualtek(R),
VTEK(R), the Telesensory logo and Telesensory(TM), and Vista(R), are trademarks
of the Company. This Prospectus also contains trademarks and tradenames of
other companies.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents, for the periods and dates indicated, summary
consolidated historical financial data for the Company. This information should
be read in conjunction with "Capitalization," "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's consolidated financial statements and the
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue............... $ 27,083 $ 27,588 $ 30,671 $ 15,317 $ 17,240
Cost of revenue........... 14,697 15,332 16,670 8,455 9,795
-------- -------- -------- -------- --------
Gross profit............. 12,386 12,256 14,001 6,862 7,445
-------- -------- -------- -------- --------
Operating expenses:
Product development...... 2,876 2,617 2,286 1,170 1,129
Sales, general and
administrative.......... 10,303 9,020 9,374 4,634 4,885
Restructuring............ 507 332 -- -- --
-------- -------- -------- -------- --------
Total operating
expenses............... 13,686 11,969 11,660 5,804 6,014
-------- -------- -------- -------- --------
Operating income (loss)... (1,300) 287 2,341 1,058 1,431
Other income (expense),
net...................... (8) (178) (83) (53) (67)
-------- -------- -------- -------- --------
Income (loss) before
income taxes............. (1,308) 109 2,258 1,005 1,364
Income taxes.............. 21 268 867 386 213(1)
-------- -------- -------- -------- --------
Net income (loss)......... $ (1,329) $ (159) $ 1,391 $ 619 $ 1,151(1)
======== ======== ======== ======== ========
Net income (loss) per
share(2)................. $ (0.36) $ (0.04) $ 0.41 $ 0.17 $ 0.35(1)
Shares used in per share
calculation(2)........... 3,715 3,738 3,376 3,567 3,300
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
ACTUAL AS ADJUSTED(3)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents..................................... $ 317 $22,111
Working capital.......................................... 3,967 27,973
Total assets............................................. 14,713 36,507
Short-term borrowings and long-term debt................. 2,945 150
Shareholders' equity..................................... 5,947 30,536
</TABLE>
- ----------
(1) The Company's effective tax rate for the six months ended June 30, 1996 was
affected by a one-time tax valuation allowance adjustment, which reduced
income tax expense and correspondingly increased net income for the period
by $312,000 or $0.09 per share. Without that adjustment, for the six months
ended June 30, 1996, income taxes would have been $525,000, net income
would have been $839,000 and net income per share would have been $0.25.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net income (loss) per share.
(3) Adjusted to reflect the sale of 2,275,000 shares of Common Stock offered by
the Company hereby, at an assumed public offering price of $12.00 per share
and after deducting the estimated underwriting discount and offering
expenses, and the anticipated application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Underwriting."
6
<PAGE>
RISK FACTORS
The following factors should be considered carefully by potential investors
in evaluating an investment in the shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in these forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those set forth in
the following risk factors and elsewhere in this Prospectus.
ADVERSE EFFECT ON PRICE OF COMMON STOCK DUE TO FLUCTUATIONS IN OPERATING
RESULTS
The Company's sales and operating results have fluctuated on a quarterly
basis and may do so in future periods. The Company's operating results are
affected by a number of factors, many of which are beyond the Company's
control. Factors contributing to these fluctuations include the timing of the
introduction and market acceptance of new products or product enhancements by
the Company and its competitors, changes in pricing by the Company and its
competitors, order cancellation or deferral by a customer, the failure to
receive an anticipated order, the relatively long sales cycle for the
Company's products to government agencies, governmental budget constraints and
the level of government funding, the cost and delays in delivery of components
and subassemblies and delays in delivery of services by suppliers, unexpected
manufacturing and other difficulties, increased product development costs and
fluctuations in general economic conditions. For example, the Company
anticipates that both net revenue and net income for the third quarter of 1996
are likely to be adversely affected as a consequence of quality problems
encountered by the Company in July and a temporary suspension of shipments of
some products for approximately one week in August. See "Management's
Discussion and the Company's Analysis of Financial Condition and Results of
Operations."
The Company typically ships products within a short time after receipt of an
order and does not usually have a significant backlog. As a result, backlog at
any point in time is not a good indicator of future net revenue, and net
revenue for any particular quarter cannot be predicted with any degree of
accuracy. Accordingly, the Company's expectations for both short- and long-
term future net revenue are based in large part on its own estimate of future
demand and not on firm customer orders. Expense levels are based, in part, on
these estimates and, since the Company is limited in its ability to reduce
expenses quickly, operating results would be adversely affected if orders and
net revenue do not meet expectations in a particular period. Due to all of the
foregoing factors, it is possible that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FAILURE TO EXPAND CONSUMER MARKET
The Company's future success will depend upon, among other factors, its
ability to increase levels of consumer awareness of and demand for the
Company's products. The Company believes that only a very small percentage of
the available customer base for the Company's products currently own
electronic or computer-based assistive devices for visual impairment. The
Company has invested and is continuing to invest in advertising and
promotional campaigns to increase consumer awareness of and demand for its
products. There can be no assurance that such advertising and promotional
campaigns will be successful. If the Company failed to increase consumer
awareness of and demand for its products and failed to increase penetration of
the consumer market, or if the consumer market failed to grow or grows more
slowly than anticipated, the Company's business, financial condition and
results of operations would be materially adversely affected.
DEPENDENCE ON DEVELOPMENT OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS
The Company's future success will depend upon, among other factors, its
ability to develop, manufacture, introduce and successfully achieve market
acceptance of new products and product enhancements. The extent and rate at
which market acceptance and penetration are achieved by future products is a
function of many variables, including price, features, reliability, marketing
and sales efforts, the development of new applications for these products,
competitive factors and general economic conditions affecting purchasing
patterns. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful
7
<PAGE>
development, introduction or marketing of new or enhanced products or that
such products will achieve market acceptance. The failure of the Company to
successfully develop and introduce new products or product enhancements would
have a material adverse effect on the Company's business, financial condition
and results of operations.
HIGHLY COMPETITIVE MARKETS
The Company competes worldwide with a number of manufacturers and
distributors of electronic and computer-based assistive devices for people
with severe visual disabilities. The Company's principal competitors based in
the United States include Optelec, Inc., HumanWare, Inc., Xerox Assistive
Technologies (a division of Xerox Corporation) and Arkenstone, Inc. The
Company's principal competitors based outside the United States include Tieman
B.V., Alva B.V., Reinecker GmbH, Metec GmbH, Low Vision International, KGS,
and Pulse Data International. Most of these companies compete with the Company
on a worldwide basis, and some of these companies have substantially greater
financial and operating resources than the Company. There can be no assurance
that the Company's competitors will not develop enhancements to, or future
generations of, competitive products that offer superior price or features
than the Company's products. Furthermore, there is no assurance that other
companies will not develop and market alternative technological approaches for
meeting the needs of severely visually impaired and blind people. Some of the
Company's markets have low cost barriers to entry, and there can be no
assurance that other companies that are not currently competitors of the
Company will not enter the Company's markets.
In addition, the Company's competitors outside the United States have cost
structures and product prices based on foreign currencies. Accordingly,
currency fluctuations could cause the Company's dollar-priced products to be
less competitive than competitors' products priced in other currencies.
Currency fluctuations could also increase the Company's costs relative to
those of its competitors, which could make it more difficult for the Company
to maintain its competitiveness in such foreign markets. Additionally, certain
foreign countries that offer reimbursement for assistive devices favor local
manufacturers, which could limit the Company's ability to compete successfully
in those countries. Furthermore, the Company believes that a number of
companies may be currently researching and testing various medical treatments
and procedures to reduce the incidence of severe visual impairment or arrest
vision deterioration. In the event such treatments or procedures prove to be
effective, demand for the Company's products could be reduced, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON LIMITED SOURCES OF SUPPLY
The Company's products have a large number of components produced by outside
suppliers. In certain instances the Company is dependent upon a sole supplier
or a limited number of suppliers, or has qualified only a single or limited
number of suppliers, for certain key components or sub-assemblies utilized in
its products. The Company's reliance on a limited group of suppliers, and
particularly on sole source suppliers, involves several risks, including the
potential inability to obtain an adequate supply of components and reduced
control over price and delivery time. Any prolonged inability to obtain
adequate deliveries could require the Company to pay more for components,
parts and other supplies, seek alternative sources of supply, delay shipment
of products and damage relationships with current and prospective customers.
Any such delay or damage could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH MANUFACTURING
The Company conducts substantially all of its manufacturing activities at
its leased facilities in Mountain View, California. The Company may experience
delays or technical and manufacturing difficulties in future product
introductions or in achieving volume production of new products or
enhancements to existing products. The Company may also incur substantial
unanticipated costs in connection with the development of new products or
product enhancements, such as greater-than-expected tooling costs and other
purchasing inefficiencies. In addition, the Company's Mountain View facility
is located in a seismically active area. A major catastrophe (such as an
earthquake or other natural disaster) could result in a prolonged interruption
of the Company's business. In addition, some of the Company's manufacturing
facilities, equipment and operations are subject to
8
<PAGE>
periodic inspection by various regulatory authorities, including inspections
for good manufacturing practices ("GMP") compliance by the Food and Drug
Administration ("FDA") and comparable state agencies. Failure to comply with
GMP or any other manufacturing requirement could result in the issuance of
warning letters, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production and criminal prosecution.
Any of the foregoing events could materially adversely affect the Company's
business, financial condition and results of operations. See "Business --
Manufacturing" and "-- Government Regulation and Safety Requirements."
DEPENDENCE ON INTERNATIONAL SALES
The Company derives a substantial portion of its revenues from international
sales. In 1993, 1994, 1995 and the first six months of 1996, the Company's
international sales were $8.9 million, $8.8 million, $10.8 million and $6.9
million, or 33%, 32%, 35% and 40%, respectively, of net revenue. As a
consequence, the Company is subject to risks associated with international
sales, including fluctuations in foreign currency exchange rates, shipping
delays, generally longer receivables collection periods, changes in applicable
regulatory policies, international monetary conditions, domestic and foreign
tax policies, trade restrictions, duties and tariffs, and economic and
political instability. Each of these factors could have a significant impact
on the Company's ability to deliver products on a competitive, profitable and
timely basis. A substantial amount of the Company's international sales are
denominated in United States dollars. Accordingly, an increase in the value of
the United States dollar relative to various foreign currencies could make the
Company's products less competitive in foreign markets, or require the Company
to reduce its prices to remain competitive, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. For those international transactions denominated in local
currencies (both sales and purchases of components), trade receivables and
accounts payable arising from international operations may contribute to
fluctuations in the Company's operating results. Additionally, future
imposition of, or significant increases in the level of, customs duties,
import quotas or other trade restrictions, could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Sales, Distribution and Marketing" and "--
Customer Service and Support."
DEPENDENCE ON INDEPENDENT DISTRIBUTORS
The Company is substantially dependent on the efforts of its independent
distributors and dealers for sales of its products and for customer service
and support. The Company's distribution and dealer agreements generally grant
exclusive territorial rights, exclusive market segment rights or some
combination thereof, and generally are terminable by either party on notice
periods ranging from three months to one year. In the event of a termination
of any such distributor or dealer relationship, there can be no assurance that
the Company could quickly find alternative distributors or dealers. In
addition, if a distributor or dealer terminates its relationship with the
Company and begins to distribute competitive products, the Company's ability
to compete in the former distributor or dealer's territory could be materially
adversely affected. Thus, the loss of one or more of the Company's
distributors or dealers could have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, the
Company has in the past extended significant amounts of trade credit to its
distributors and dealers, which, in one instance, was approximately $1,000,000
as of June 30, 1996. The failure of a distributor or dealer to repay trade
credits could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Sales,
Distribution and Marketing."
DEPENDENCE ON REFERRAL BUSINESS
As part of its mix of marketing strategies, the Company and its distributors
and dealers maintain close working relationships with many low vision clinics,
blindness service agencies, rehabilitation organizations, ophthalmologists,
optometrists, rehabilitation counselors or similar advisors to people with
visual problems. A significant amount of the Company's business is derived
from referrals from such people, organizations and agencies. Sometimes such
relationships are a matter of contract, but more often they are informal
relationships
9
<PAGE>
developed over an extended period of time. The Company's competitors compete
with the Company for such referral sources. The loss of one or more of these
referral sources could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Sales, Distribution and Marketing."
DEPENDENCE ON GOVERNMENT FUNDING AND REIMBURSEMENT
Historically, in the United States approximately 40% of the Company's
products have been purchased by institutions, agencies and other service
providers that are heavily dependent on federal, state and local government
funding. In the United States, the purchase of the Company's products is
typically not covered by private health insurance or reimbursable under
Medicare or other publicly-funded insurance programs. However, federal block
grants, augmented by state funding, are generally available to state
rehabilitation and education agencies to purchase the Company's products. Many
other countries have social welfare systems that provide reimbursement for the
procurement of the Company's products. In recent years, primarily as a result
of budget constraints, the level of government funding has been subject to
wide fluctuations or cutback, which has resulted in the delay or cancellation
of orders and has had an adverse effect on the Company's business, financial
condition and results of operations. If government funding were to be reduced,
it would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Reimbursement and Third-
Party Payment."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's business strategy includes seeking to acquire businesses that
would enable it to better meet the needs of its customers. The Company
acquired two of its international distributors in March 1996. The Company may
pursue additional acquisitions in the future. The Company is not currently
negotiating any potential acquisition, and there is no assurance that the
Company will be able to conclude any such transactions. Acquisitions involve
numerous risks, including difficulties in the assimilation of the acquired
company's employees, operations and products, uncertainties associated with
operating in new markets and working with new customers, the potential loss of
the acquired company's key employees and the costs associated with completing
the acquisition and integrating the acquired company. Furthermore, any future
acquisitions may result in potentially dilutive issuances of equity
securities, increased debt, cash payments and contingent liabilities and
amortization expense related to intangible assets acquired, any of which could
materially adversely affect the Company's business, financial condition and
results of operations. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INTELLECTUAL PROPERTY AND RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT
The Company has two issued patents, neither of which is believed to provide
significant protection against competition. There can be no assurance that
competitors, some of which have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets. Furthermore, the laws of certain foreign countries do
not protect the Company's intellectual property rights to the same extent as
do the laws of the United States. Litigation or regulatory proceedings, which
could result in substantial cost and uncertainty to the Company, may also be
necessary to enforce intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. One
competitor of the Company has claimed that the Company and several of the
Company's competitors are violating both a United States and a European patent
with respect to a function of the Company's PowerBraille product. The patent
holder has been making these claims for more than three years, but has not yet
filed any legal action against either the Company or, to the Company's
knowledge, against any other company with respect to their allegations of
patent infringement. There can be no assurance that the Company will be able
to successfully defend itself from this or any other allegation of
infringement or claims of invalidity. It is also possible that the Company may
need to acquire licenses to, or contest the validity of, issued or pending
patents of third parties relating to the Company's technology. There can be no
assurance that any of such licenses would
10
<PAGE>
be made available to the Company on acceptable terms, if at all, or that the
Company, if it were to contest the validity of any issued or pending patents,
would prevail. In addition, the Company could incur substantial costs in
defending itself in suits brought against the Company on its patents or in
bringing suits against third parties. The Company primarily relies on trade
secret or proprietary process protection, which it seeks to protect, in part,
through appropriate confidentiality and proprietary information agreements
with its employees and consultants. There can be no assurance that the
proprietary information or confidentiality agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets and proprietary know-how will not otherwise become
known to or be independently developed by others. Furthermore, there can be no
assurance that other companies with significantly greater financial resources
will not enter the Company's markets. See "Business -- Patents and Proprietary
Rights."
DEPENDENCE ON KEY PERSONNEL
The Company's operating results depend to a significant extent upon the
continued service of a number of key executive, engineering, marketing, sales,
and technical personnel, particularly its Chairman, President and Chief
Executive Officer, Larry Israel. Except for the Company's Vice President,
European Operations, none of the Company's employees is subject to any
employment agreement. Consequently, any of the Company's employees may
voluntarily terminate their employment with the Company at any time. The loss
of the services of one or more of the Company's key employees could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company maintains key employee life insurance on
the life of Larry Israel in the amount of $500,000. There can be no assurance
that such amount will be sufficient to compensate the Company for the loss of
the services of such individual. The Company also believes that its future
success will depend in large part on its ability to attract and retain
qualified personnel. The competition for such personnel is intense, and the
loss of such persons, as well as the failure to recruit additional personnel
in a timely manner, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Employees" and "Management -- Employment Agreement."
RISKS ASSOCIATED WITH GOVERNMENT REGULATION OF THE COMPANY'S PRODUCTS
In the United States, many of the Company's products are regulated as
medical devices by the FDA under the Federal Food, Drug, and Cosmetic Act. The
Company's products are exempt from the 510(k) premarket notification process.
However, the Company is required to register as a medical device manufacturer
with the FDA and state agencies such as the California Department of Health
Services, to list its products with the FDA, and to adhere to applicable FDA
regulations regarding GMPs which include testing, control and documentation
requirements. The Company is also regulated by the FDA under the Radiation
Control for Health and Safety Act, which requires companies who produce
electronic products to comply with certain standards, including design and
operation requirements, and to certify product labeling and submit reports to
FDA that their products comply with such standards. A failure of the Company
to comply with GMP or any other applicable requirement could result in the
issuance of warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production and criminal
prosecution, any one of which would have a material adverse effect on the
Company's business, financial condition and results of operations. On August
16, 1996, the Company was notified by the FDA that its testing program for
certifying some of its video magnifier products was not in compliance with the
U.S. Federal Performance Standard for Television Receivers, 21 CFR 1020.10,
and was therefore disapproved, which required a temporary suspension of
shipment of certain products. Upon presentation of additional information to
the FDA, the disapproval was rescinded on August 23, 1996. The FDA also
advised the Company that certain video magnifier units shipped prior to August
1995 did not have the required certification labels affixed to them and,
therefore, that purchaser notification and corrective action might be
required. The Company submitted an application for exemption from notification
requirements. The FDA has advised the Company that it will not act on this
application until the Company has tested a representative sample of such
previously-shipped units to determine if they are in compliance with the
applicable performance standards. The Company is obligated to complete such
testing and to provide the requested information to the FDA by November 10,
1996. The Company believes that all of its previously-shipped video magnifier
products
11
<PAGE>
are in compliance with applicable performance standards, and therefore it is
unlikely that any further action will be required. However, if the FDA denies
the Company's application and requires notification to consumers, it could
have a material adverse effect on the Company's business, financial condition
and results of operations. Regulations regarding the manufacture and sale of
the Company's products are subject to change and there can be no assurance
that the Company's current or future products will continue to be exempt from
the 510(k) premarket notification process. If the Company's products were to
become subject to the 510(k) premarket notification process or the more
rigorous premarket (PMA) process, the Company could experience substantial
cost increases, including product development costs, as well as substantial
delays in new product introductions, which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Sales of medical devices outside the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain clearance or approval for sale internationally may be
longer or shorter than that required for FDA clearance or approval, and the
requirements may differ. For sales of the Company's products in Europe, the
European Union has promulgated rules requiring that electronic products
delivered to Europe after January 1, 1996 bear the "CE" mark, a symbol of
compliance with applicable European electronic device directives. Failure of
the Company to comply with international regulatory requirements could have an
adverse effect on the Company's ability to sell its products in these markets,
which would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Government
Regulation and Safety Requirements."
RISKS ASSOCIATED WITH SIGNIFICANT GROWTH
The Company has recently experienced, and may continue to experience,
significant growth in the scope of its operating and financial systems. This
may result in additional responsibilities for many management and staff
personnel, and may place a significant strain on the Company's management,
operating and financial systems, and resources. To accommodate sustained
growth, compete effectively, and manage planned future growth, the Company may
be required to implement and improve operational, financial and management
information systems, procedures and controls. The Company's future success,
and maintenance of a sustained growth rate, will be heavily influenced by its
ability to undertake and manage these activities in a successful manner. The
Company's failures in these areas could have a material adverse effect on the
Company's business, financial condition and results of operations.
OWNERSHIP BY MANAGEMENT AND AFFILIATES
Immediately following this Offering, assuming no exercise of the
Underwriters' over-allotment option, the Company's executive officers,
directors and their affiliates will beneficially own approximately 19% of the
outstanding shares of the Company's Common Stock, including options held by
them that are exercisable within 60 days of June 30, 1996. As a result, such
persons, acting together, would have the ability to exercise significant
influence over all matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership might have the effect of delaying or preventing a
change in ownership of the Company.
ANTI-TAKEOVER EFFECTS OF PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the powers, rights, preferences
and restrictions granted to or imposed upon any unissued series of
undesignated Preferred Stock, and to fix the number of shares constituting any
series and the designation of such series, without any further vote or action
by the Company's shareholders. The Preferred Stock could be issued with
voting, liquidation, dividend and other rights superior to the rights of the
holders of Common Stock. The issuance of Preferred Stock could have the effect
of delaying or preventing a change in control of the Company, and may affect
the market price of the Common Stock, and the voting and other rights of the
holders of Common Stock. See "Principal and Selling Shareholders" and
"Description of Capital Stock."
12
<PAGE>
NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common Stock
of the Company, and there can be no assurance that an active trading market
will develop or be sustained after this Offering. The initial public offering
price will be determined through negotiations among the Company, the Selling
Shareholders and the Representatives of the Underwriters based on several
factors and may not be indicative of the market price of the Common Stock
after this Offering. See "Underwriting." The market prices for securities of
companies similar to the Company have been highly volatile. Announcements
regarding technological innovations or new commercial products by the Company
or its competitors, government regulations, or developments concerning
proprietary rights have historically had and are expected to continue to have,
a significant effect on the market prices of the stocks of similar companies.
The market price of the shares of Common Stock may be highly volatile and may
be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, announcements of
technological innovations, new products, or new contracts by the Company or
its competitors, developments with respect to copyrights or proprietary
rights, general market conditions or other factors. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the Common
Stock of similar companies and that have often been unrelated to the operating
performance of particular companies. These broad market fluctuations may also
adversely effect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has occurred against the issuing company.
There can be no assurance that such litigation will not occur in the future
with respect to the Company. Such litigation could result in substantial costs
and a diversion of management's attention and resources, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Any adverse determination in such litigation could also
subject the Company to significant liabilities. See "Dilution" and "Shares
Eligible for Future Sale."
The Company has been advised by the Representatives that the Representatives
presently intend to make a market in the Common Stock offered hereby; however,
the Representatives are not obligated to do so, and any market making activity
may be discontinued at any time without notice. There can be no assurance that
an active public market for the Common Stock will develop and continue after
this Offering.
SHARES ELIGIBLE FOR FUTURE SALE; LOCK-UP AGREEMENTS; POSSIBLE ADVERSE EFFECT
ON FUTURE MARKET PRICE
Sales of a substantial number of shares of Common Stock in the public market
after this Offering could adversely affect the market price of the Common
Stock prevailing from time to time. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act of 1933, as amended (the "Securities Act"), and lock-up
agreements executed by a substantial number of the security holders of the
Company under which such security holders have agreed not to sell or otherwise
dispose of any of their shares for a period of 180 days after the date of this
Prospectus, without the prior written consent of Jefferies & Company, Inc.
However, Jefferies & Company, Inc. may, in their sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements, which could render a significant number of shares eligible
for immediate sale and have an adverse effect on the price of the Common
Stock. In addition to the 2,275,000 shares of Common Stock offered by the
Company and the 625,000 shares of Common Stock offered by the Selling
Shareholders, there will be 2,379,322 shares of Common Stock outstanding as of
the date of this Prospectus (assuming no exercise of outstanding options after
June 30, 1996) all of which are "restricted" shares (the "Restricted Shares")
under the Securities Act. As a result of the lock-up agreements described
above and the provisions of Rules 144(k), 144 and 701, the Restricted Shares
will be available for sale in the public market as follows: (i) 232,786 shares
will be eligible for immediate sale on the date of this Prospectus, (ii)
approximately an additional 96,067 shares, of which 90,930 shares are issuable
upon exercise of currently vested options, will be eligible for sale 90 days
after the date of this Prospectus, (iii) approximately an additional 1,994,321
shares, of which 2,950 shares are issuable upon exercise of currently vested
options, will be eligible for sale 180 days after the date of this Prospectus
upon expiration of lock-up agreements, and (iv) approximately an additional
150,000 shares will be eligible for sale at various times
13
<PAGE>
thereafter. The Company intends to file a registration statement covering the
sale of 1,327,500 shares of Common Stock reserved for issuance under its 1985
Incentive Stock Option Plan, 1993 Stock Plan, 1995 Stock Plan, and Employee
Stock Purchase Plan. As of June 30, 1996, options to purchase 623,494 shares
of Common Stock were outstanding and 329,006 shares were reserved for future
issuance under the Company's stock plans. Subsequent to June 30, 1996, the
Company approved an increase in the number of shares reserved for issuance
under the 1995 Stock Plan by 250,000 and adopted the Employee Stock Purchase
Plan and reserved 125,000 shares of Common Stock for issuance thereunder.
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of the Company's Common Stock. Investors
purchasing shares of Common Stock in this Offering will therefore incur
immediate and substantial net tangible book value dilution. See "Dilution."
MANAGEMENT DISCRETION OVER PROCEEDS OF THE OFFERING
The Company intends to use approximately $3.0 million of the net proceeds of
this Offering to repay outstanding indebtedness, approximately $3.0 million to
expand the Company's marketing efforts, approximately $3.0 million for product
development activities, approximately $2.0 for productivity improvements and
the balance for other general corporate purposes, including working capital
and possible acquisitions of complementary businesses and technologies,
although the Company currently has no agreements or commitments with respect
to any such transactions. Accordingly, the Company will have broad discretion
as to the application of such proceeds. An investor will not have an
opportunity to evaluate the economic, financial and other relevant information
which will be utilized by the Company in determining the application of such
proceeds. See "Use of Proceeds."
NO DIVIDENDS
The Company does not anticipate declaring or paying any cash dividends on
its Common Stock in the foreseeable future. The Company currently intends to
retain its earnings for use in the operation of the business. In addition, the
Company's current credit agreements with its domestic bank prohibit the
payment of cash dividends on its capital stock without the bank's prior
written consent.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
being offered hereby, after deducting the underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$24.6 million ($29.4 million if the Underwriters' over-allotment option is
exercised in full) at an assumed offering price of $12.00 per share.
The Company intends to use approximately $3.0 million of the net proceeds of
this Offering for the repayment of short-term borrowings that as of June 30,
1996 consisted of $1.7 million under its revolving line of credit, which bears
interest at the bank's prime rate plus 1.25% and expires on October 1, 1996,
and long-term debt that as of June 30, 1996 consisted of $0.2 million under
two term loans, which bear interest at the bank's prime rate plus 1.5% or at a
fixed rate of 10%, and approximately $0.9 million under a term loan due March
1999, which bears interest at the bank's prime rate plus 1.5%, approximately
$3.0 million in connection with the expansion of the Company's marketing
efforts, approximately $3.0 million for product development activities,
approximately $2.0 million for productivity improvement including
manufacturing processes and tooling and the balance for general corporate
purposes including working capital and possible acquisitions of complementary
businesses and products, or to obtain the right to use complementary
technologies, although no such acquisitions or investments are being
negotiated by the Company at the present time and there can be no assurance
that such acquisitions or investments will be made. Pending the use of the net
proceeds for the above purposes, the Company intends to invest such funds in
United States government securities or other investment-grade securities,
including short-term, interest-bearing money market funds. The Company will
not receive any of the proceeds from the sale of Common Stock by the Selling
Shareholders. See "Principal and Selling Shareholders."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate doing so in the foreseeable future. The Company
currently intends to retain its earnings for use in the operation of the
business. In addition, the Company's current credit agreements with its
domestic bank prohibit the payment of cash dividends on its capital stock
without the bank's prior written consent. See Note 7 of Notes to Consolidated
Financial Statements.
15
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1996 (i) on a historical basis and (ii) as adjusted to give effect
to the receipt of the net proceeds from the sale of 2,275,000 shares of Common
Stock offered by the Company hereby at an assumed offering price of $12.00 per
share and after deducting the underwriting discount and estimated offering
expenses payable by the Company, and as adjusted to give effect to the
issuance of 112,500 shares of Common Stock issuable upon the net exercise of
all outstanding warrants.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and equivalents........................................ $ 317 $22,111
====== =======
Short-term borrowings and current portion of long-term
debt....................................................... $2,237 $ 25
====== =======
Long-term debt.............................................. $ 708 $ 125
------ -------
Shareholders' equity:
Preferred stock $.02 par value; 5,000,000 shares
authorized, none issued and outstanding, actual and as
adjusted................................................. -- --
Common stock; $.02 par value; 10,000,000 shares
authorized, 2,891,822 shares issued and outstanding,
actual; 40,000,000 shares authorized, 5,279,322 shares
issued and outstanding, as adjusted(1)................... 58 106
Additional paid-in capital................................ 3,314 27,855
Accumulated translation adjustment........................ 13 13
Retained earnings......................................... 2,562 2,562
------ -------
Total shareholders' equity.............................. 5,947 30,536
------ -------
Total capitalization.................................... $6,655 $30,661
====== =======
</TABLE>
- ----------
(1) Excludes 623,494 shares of Common Stock issuable upon the exercise of
stock options outstanding as of June 30, 1996, at a weighted average
exercise price of $2.98 per share. See "Management -- Stock and Employee
Benefit Plans" and Note 9 of Notes to Consolidated Financial Statements.
16
<PAGE>
DILUTION
At June 30, 1996, the pro forma net tangible book value of the Company was
$4,158,000, or approximately $1.38 per share of outstanding Common Stock. "Pro
forma net tangible book value per share" represents the Company's
shareholders' equity, less intangible assets of $1,789,000 for the excess of
purchase costs over net assets of Sensory Systems Limited and Teletec SARL,
acquired in March 1996, and a covenant not to compete, divided by 3,004,322
actual shares of Common Stock outstanding as of June 30, 1996, including
shares of Common Stock issued in connection with the exercise of outstanding
warrants upon the closing of this Offering.
Net pro forma tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the Offering made hereby and the pro forma net tangible book value
per share of Common Stock immediately after completion of this Offering. After
giving effect to the sale by the Company of 2,275,000 shares of Common Stock
in this Offering at an assumed initial offering price of $12.00 per share and
after deduction of underwriting discounts and commissions and estimated
offering expenses, the pro forma net tangible book value of the Company as of
June 30, 1996 would have been $28,747,000 or approximately $5.45 per share.
This represents an immediate increase in pro forma net tangible book value of
$4.07 per share to existing shareholders and an immediate dilution in pro
forma net tangible book value of $6.55 per share to purchasers of Common Stock
in the Offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
Pro forma net tangible book value per share before this
Offering................................................... $1.38
Increase per share attributable to sale of Common Stock in
this Offering.............................................. 4.07
Pro forma net tangible book value per share after this
Offering..................................................... 5.45
------
Dilution per share to new investors........................... $ 6.55
======
</TABLE>
The following table summarizes at June 30, 1996, the number of shares of
Common Stock sold by the Company, the total consideration paid to the Company
and the average price per share paid by the existing shareholders and by the
new investors purchasing shares of Common Stock in this Offering at an assumed
initial public offering price of $12.00 per share, before deducting the
estimated underwriting discount and offering expenses payable by the Company.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED (1) CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 3,004,322 57% $ 2,612,000 9% $ 0.87
New investors............... 2,275,000 43 27,300,000 91 $12.00
--------- --- ----------- ---
Total................... 5,279,322 100% $29,912,000 100%
========= === =========== ===
</TABLE>
- ----------
(1) Sales by the Selling Shareholders in this Offering will reduce the number
of shares of Common Stock held by existing shareholders to 2,379,322
shares or 45% of the total number of shares of Common Stock to be
outstanding after this Offering, and will increase the number of shares
held by new investors to 2,900,000 shares, or approximately 55% of the
total number of shares of Common Stock to be outstanding after this
Offering (approximately 58% if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Shareholders."
The foregoing tables assume no exercise of outstanding options after June
30, 1996 and include the pro forma effects of the issuance of 112,500 shares
of Common Stock pursuant to the net exercise of all outstanding warrants. As
of June 30, 1996, there were outstanding options to purchase 623,494 shares of
Common Stock. To the extent that such options are exercised, there will be
further dilution to new investors. See "Management --Director Compensation,"
"-- Stock and Employee Benefit Plans," and Note 9 of Notes to Consolidated
Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the Company for the
years ended December 31, 1993, 1994, and 1995 have been derived from and are
qualified by reference to the Company's Consolidated Financial Statements
included elsewhere in this Prospectus, which have been audited by Deloitte &
Touche LLP, independent auditors. The consolidated statement of operations
data set forth below for the years ended December 31, 1991 and 1992 have been
derived from the Company's audited financial statements not included herein.
The selected consolidated financial data for the six months ended June 30,
1995 and 1996 are unaudited but have been prepared on a basis substantially
consistent with the audited consolidated financial statements and, in the
opinion of management, such unaudited consolidated financial statements
contain all adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the financial position and results of operations
of the Company as of such dates and for such periods. This selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue:
Low Vision
Products(1)........... -- -- $18,184 $19,143 $21,719 $ 10,902 $ 12,013
Blindness
Products(1)........... -- -- 8,899 8,445 8,952 4,415 5,227
------- ------- ------- ------- ------- -------- --------
Net revenue........... $30,122 $29,677 27,083 27,588 30,671 15,317 17,240
Cost of revenue......... 15,664 16,250 14,697 15,332 16,670 8,455 9,795
------- ------- ------- ------- ------- -------- --------
Gross profit.......... 14,458 13,427 12,386 12,256 14,001 6,862 7,445
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Product development.... 2,538 3,020 2,876 2,617 2,286 1,170 1,129
Sales, general and
administrative........ 10,272 11,016 10,303 9,020 9,374 4,634 4,885
Restructuring(2)....... -- -- 507 332 -- -- --
------- ------- ------- ------- ------- -------- --------
Total operating
expenses............ 12,810 14,036 13,686 11,969 11,660 5,804 6,014
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................. 1,648 (609) (1,300) 287 2,341 1,058 1,431
Other income (expense),
net.................... (306) 45 (8) (178) (83) (53) (67)
------- ------- ------- ------- ------- -------- --------
Income (loss) before
income taxes........... 1,342 (564) (1,308) 109 2,258 1,005 1,364
Income taxes (benefit).. 280 (84) 21 268 867 386 213(3)
------- ------- ------- ------- ------- -------- --------
Net income (loss)....... $ 1,062 $ (480) $(1,329) $ (159) $ 1,391 $ 619 $ 1,151(3)
======= ======= ======= ======= ======= ======== ========
Net income (loss) per
share(4)............... $ 0.26 $ (0.13) $ (0.36) $ (0.04) $ 0.41 $ 0.17 $ 0.35(3)
Shares used in per share
calculation(4)......... 4,015 3,596 3,715 3,738 3,376 3,567 3,300
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents........ $ 1,259 $ 1,413 $ 1,198 $ 423 $ 169 $ 317
Working capital............. 5,614 5,506 4,210 3,685 3,362 3,967
Total assets................ 13,843 13,055 10,881 10,921 11,044 14,713
Short-term borrowings and
long-term debt............. 74 2,231 1,618 1,787 1,896 2,945
Shareholders' equity........ 6,844 6,016 4,101 4,004 3,914 5,947
</TABLE>
- ----------
(1) Separate revenue reporting for Low Vision Products and Blindness Products
prior to 1993 is not available.
(2) Reflects the 1993 and 1994 headquarter and international subsidiary
restructuring expenses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) The Company's effective tax rate for the six months ended June 30, 1996
was affected by a one-time tax valuation allowance adjustment, which
reduced income tax expense and correspondingly increased net income for
that period by $312,000 or $0.09 per share. Without that adjustment, for
the six months ended June 30, 1996, income tax expense would have been
$525,000, net income would have been $839,000 and net income per share
would have been $0.25.
(4) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of shares used in per share calculation.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of operations and financial condition of
Telesensory should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the Section entitled "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
Telesensory Corporation develops, manufactures and markets electronic and
computer-based products to assist people with severe visual disabilities to
achieve greater independence and privacy. The Company is the leading provider
of such products in North America, and one of the two leading companies
worldwide. The Company makes video magnifiers and other electronic and
computer-based assistive devices for people who are severely visually impaired
and various braille-related and other electronic and computer-based assistive
devices for those who are totally blind or without useable light perception.
Telesensory was founded in 1970. In the early 1970s Telesensory pioneered
the application of technology to serve the needs of blind individuals. During
the same period, another company serving visually disabled people, Visualtek,
Inc. ("VTEK"), pioneered the use of video magnifiers to serve the needs of
severely visually impaired individuals. In 1989 the Company acquired VTEK.
During 1993, the Company discontinued its direct sales subsidiaries in
Germany, Austria and France, introduced a cost-reduction program and
restructured certain operating activities in the United States. In 1994, the
Company discontinued its manufacturing operations in Ireland and, following a
management change, undertook further restructuring activities in the United
States with the intention of reducing costs and increasing overall
efficiencies. These cost reduction measures resulted in restructuring charges
in 1993 and 1994. In March 1996, the Company acquired Sensory Systems Limited
("SSL") located in the United Kingdom and its wholly-owned subsidiary Teletec
SARL ("Teletec") located in France, which strengthened the Company's
international operations. All of the Company's products are now manufactured
in its Mountain View, California facility.
The Company's net revenue is derived from sales of its Low Vision Products
and Blindness Products, which include sales of OEM components, and to a lesser
extent, from service and support activities. The Company operates in one
market segment. Net revenue from product sales is generally recognized at the
time of shipment, net of allowances or discounts. In the United States, the
Company's Low Vision Products are sold to independent distributors and dealers
who resell to end-user customers, and the Company generally markets its
Blindness Products directly to the end-user. In the United Kingdom and France,
the Company sells its Low Vision and Blindness Products directly to the end-
user through its wholly-owned subsidiaries SSL and Teletec. In all other
countries, the Company generally sells its Low Vision Products and Blindness
Products through independent distributors. Sales to United States and
international distributors are made on open credit terms or letters of credit
and generally are not subject to a right of return. The Company believes that
distributors generally carry minimal inventory. Sales of the Company's
products in international markets are generally denominated in United States
dollars. International sales are subject to a variety of risks. See "Risk
Factors -- Dependence on International Sales." The Company believes that its
sales are not materially affected by seasonality.
Cost of revenue consists primarily of the cost of components and
subassemblies, completed products, royalties, assembling, packaging and
testing components and software at the Company's facility, and labor and
overhead associated therewith. Product development costs consist primarily of
costs of engineering personnel. The Company employs a staff of engineers that
is dedicated to the development of new products and the improvement of
existing products. Product development costs are expensed as incurred. Sales,
general and administrative costs consist primarily of costs of personnel,
sales commissions, travel, advertising and promotion, facilities, legal,
accounting, insurance and the company-wide profit sharing plan. Except for
facility and insurance costs, these items are not allocated to other
departments within the Company.
19
<PAGE>
Although the Company has sustained growth of net revenue and operating income
before restructuring expenses for the last eight quarters, the Company's sales
and operating results have fluctuated on a quarterly basis and may do so in
future periods. The Company's operating results are affected by a number of
factors, many of which are beyond the Company's control. Factors contributing
to these fluctuations include the timing of the introduction and market
acceptance of new products or product enhancements by the Company and its
competitors, changes in pricing by the Company and its competitors, order
cancellation or deferral by a customer, the failure to receive an anticipated
order, the relatively long sales cycle for the Company's products to government
agencies, governmental budget constraints and the level of government funding,
the cost and delays in delivery of components and subassemblies and delays in
delivery of services by suppliers, unexpected manufacturing and other
difficulties, increased product development costs and fluctuations in general
economic conditions.
The Company anticipates that both net revenue and net income for the third
quarter of 1996 are likely to be adversely affected as a consequence of quality
problems encountered by the Company in July, and a temporary suspension of
shipments of some of the Company's products for approximately one week in
August. As a result, the Company expects net income for the third quarter of
1996 to be lower than average quarterly earnings during the first six months of
1996. The Company believes that these specific problems have been corrected and
are not likely to affect future quarterly operating results.
RESULTS OF OPERATIONS
The following table sets forth selected operations data of the Company
expressed as a percentage of net revenue for the periods indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue....................... 54.3 55.6 54.4 55.2 56.8
----- ----- ----- ----- -----
Gross profit........................ 45.7 44.4 45.6 44.8 43.2
----- ----- ----- ----- -----
Operating expenses:
Product development................. 10.6 9.5 7.4 7.6 6.6
Sales, general and administrative... 38.0 32.7 30.6 30.3 28.3
Restructuring....................... 1.9 1.2 -- -- --
----- ----- ----- ----- -----
Total operating expenses.......... 50.5 43.4 38.0 37.9 34.9
----- ----- ----- ----- -----
Operating income (loss)............... (4.8) 1.0 7.6 6.9 8.3
Other income (expense), net........... -- (0.6) (0.3) (0.3) (0.4)
----- ----- ----- ----- -----
Income (loss) before income taxes..... (4.8) 0.4 7.3 6.6 7.9
Income taxes.......................... 0.1 1.0 2.8 2.6 1.2 (1)
----- ----- ----- ----- -----
Net income (loss)..................... (4.9)% (0.6)% 4.5% 4.0% 6.7%(1)
===== ===== ===== ===== =====
</TABLE>
- --------
(1) The Company's effective tax rate for the six months ended June 30, 1996 was
affected by a one-time tax valuation allowance adjustment, which reduced
income taxes and correspondingly increased net income for that period by
$312,000 or 1.8% of net revenue. Without that adjustment, for the six
months ended June 30, 1996, income taxes would have been $525,000 or 3.0%
of net revenue and net income would have been $839,000 or 4.9% of net
revenue.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Revenue. Net revenue for the six months ended June 30, 1996 was $17.2
million, an increase of $1.9 million or 12.6% from $15.3 million for the six
months ended June 30, 1995. In April 1996, the Company began sales operations
through its newly acquired distribution subsidiaries, SSL and Teletec in
Europe. These distribution subsidiaries contributed an incremental $0.6 million
in net revenue in the second quarter of 1996.
20
<PAGE>
Low Vision Products sales for the six months ended June 30, 1996 were $12.0
million, an increase of $1.1 million or 10.2% from $10.9 million for the six
months ended June 30, 1995. This increase was primarily attributable to the
18% unit volume increase in sales of video magnifiers to 6,436 units in the
first six months of 1996 from 5,467 in the first six months in 1995, offset by
a decrease in the average selling price. The average selling price decreased
due to increased sales of the Aladdin product line, which has a lower average
selling price than its predecessor, and the transition from employee sales
personnel to independent distributors for Low Vision Products, which was
completed in the first eight months of 1995. The effect of the decrease in
average selling price was offset by a decrease in selling, general and
administrative expense relating to fewer employee sales personnel. Blindness
Products sales for the six months ended June 30, 1996 were $5.2 million, a
$0.8 million or 18.4% increase from $4.4 million for the six months ended June
30, 1995. This increase in Blindness Products sales was due primarily to an
increase in international sales. The Company had international sales of $6.9
million and $5.3 million in the first six months of 1996 and 1995,
respectively, representing 40.3% and 34.9% of the Company's net revenue in the
first six months of 1996 and 1995, respectively.
Gross Profit. Gross profit for the six months ended June 30, 1996 was $7.4
million, an increase of $0.5 million or 8.5% from $6.9 million for the six
months ended June 30, 1995. Gross margin decreased to 43.2% in the first six
months of 1996 from 44.8% for the first six months of 1995 primarily due to
lower average selling prices resulting from the transition from employee sales
personnel to independent distributors for Low Vision Products discussed above.
The decrease in gross profit resulting from this transition was offset by a
decrease in sales, general and administrative expense relating to fewer
employee sales personnel.
Product Development. Product development expense for the six months ended
June 30, 1996 was $1.1 million, a decrease of $0.1 million or 3.5% from $1.2
million for the six months ended June 30, 1995, representing 6.6% and 7.6% of
net revenue, respectively. The lower product development expense for the first
six months of 1996 was due primarily to more effective utilization of
development resources.
Sales, General and Administrative. Sales, general and administrative expense
was $4.9 million for the six months ended June 30, 1996, an increase of $0.3
million or 5.4% from $4.6 million for the six months ended June 30, 1995. This
increase was due primarily to increased Low Vision Products marketing expenses
associated with the radio advertising program implemented in the first six
months of 1996, offset by the transition from employee sales personnel to
independent distributors discussed above. Sales, general and administrative
expense represented 28.3% and 30.3% of net revenue in the first six months of
1996 and 1995, respectively.
Income Taxes. Income taxes were $0.2 million for the six months ended June
30, 1996, a decrease of $0.2 million or 44.8% from $0.4 million for the six
months ended June 30, 1995. The Company's effective tax rates were 15.6% and
38.4% for the first six months of 1996 and 1995, respectively. The Company's
effective tax rate in 1996 was approximately 24.5% lower than the combined
statutory rate resulting primarily from a one-time tax valuation adjustment of
$0.3 million and the Company's foreign sales corporation.
Net Income. Net income was $1.2 million for the six months ended June 30,
1996, an increase of $0.5 million from $0.6 million for the six months ended
June 30, 1995. Net income expressed as a percentage of net revenue was 6.7%
and 4.0% in the six months ending June, 1996 and 1995, respectively. Excluding
the one-time tax valuation adjustment mentioned above, the Company would have
had net income of $0.8 million for the six months ended June 30, 1996, and net
income expressed as a percentage of net revenue would have been 4.9%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Revenue. Net revenue for the year ended December 31, 1995 was $30.7
million, an increase of $3.1 million or 11.2% from $27.6 million for the year
ended December 31, 1994. Low Vision Products sales for the year ended December
31, 1995 were $21.7 million, an increase of $2.6 million or 13.5% from $19.1
million for the year ended December 31, 1994. This increase was primarily
attributable to a 53% unit volume increase in sales of video magnifiers to
11,091 units in 1995 from 7,256 in 1994 offset by a decrease in the average
selling price. The increase in units sold and decrease in average selling
price reflected the transition from employee sales personnel to independent
distributors for Low Vision Products completed in 1995 and the introduction of
the
21
<PAGE>
Aladdin product line in September 1994. The Aladdin is a highly innovative,
advanced video magnifier, which has a lower average selling price than its
predecessor. Blindness Products sales for the year ended December 31, 1995
were $9.0 million, an increase of $0.6 million or 6.0% from $8.4 million for
the year ended December 31, 1994. This increase was primarily attributable to
an increase in unit sales of refreshable braille devices and braille cells.
The Company had international sales of $10.8 million and $8.8 million in 1995
and 1994, respectively representing 35.1% and 31.8% of the Company's net
revenue in 1995 and 1994, respectively.
Gross Profit. Gross profit for the year ended December 31, 1995 was $14.0
million, an increase of $1.7 million or 14.2% from $12.3 million for the year
ended December 31, 1994. Gross margin increased to 45.6% in 1995 from 44.4% in
1994 primarily due to higher margins on the Aladdin product line and economies
of scale from higher volume manufacturing, which were offset in part by lower
average selling prices due to the transition from employee sales personnel to
independent distributors for Low Vision Products.
Product Development. Product development expense for the year ended December
31, 1995 was $2.3 million, a decrease of $0.3 million or 12.6% from $2.6
million for the year ended December 31, 1994, representing 7.4% and 9.5% of
net revenue, respectively. The decrease in product development expense from
1994 to 1995 was due primarily to the completion of the development of the
Aladdin during 1994 and more effective utilization of development resources in
1995.
Sales, General and Administrative. Sales, general and administrative expense
was $9.4 million for the year ended December 31, 1995, an increase of $0.4
million or 3.9% from $9.0 million for the year ended December 31, 1994. This
increase was due primarily to the costs associated with the implementation of
a company-wide profit sharing plan, partially offset by the transition to
independent distributors for Low Vision Products. Sales, general and
administrative expense accounted for 30.6% and 32.7% of net revenue in 1995
and 1994, respectively.
Income Taxes. Income taxes were $0.9 million for the year ended December 31,
1995, an increase of $0.6 million or 223.5% from $0.3 million for the year
ended December 31, 1994. The Company's effective tax rates were 38.4% and
245.9% in 1995 and 1994, respectively. The Company's effective tax rate in
1995 was approximately 1.7% lower than the combined statutory rate resulting
primarily from the Company's foreign sales corporation. The 1994 effective tax
rate differs from the combined statutory rate due primarily to the tax impact
resulting from the closure of its international subsidiaries and its
operations in Ireland.
Net Income. Net income was $1.4 million for the year ended December 31,
1995, an increase of $1.6 million from $(0.2) million for the year ended
December 31, 1994. Net income (loss) expressed as a percentage of net revenue
was 4.5% and (0.6)% in 1995 and 1994, respectively.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net Revenue. Net revenue for the year ended December 31, 1994 was $27.6
million, an increase of $0.5 million or 1.9% from $27.1 million for the year
ended December 31, 1993. Low Vision Products sales for the year ended December
31, 1994 were $19.1 million, an increase of $0.9 million or 5.3% from $18.2
million for the year ended December 31, 1993. This increase was primarily
attributable to a 17% unit volume increase in sales of video magnifiers to
7,256 units in 1994 from 6,194 in 1993 offset by a decrease in the average
selling price, reflecting the introduction of the Aladdin product line in
September 1994. Blindness Products sales for the year ended December 31, 1994
were $8.4 million, a decrease of $0.5 million or 5.1% from $8.9 million for
the year ended December 31, 1993. This decrease was attributable to reduced
unit sales volumes in most Blindness Products categories due to increased
competition and the delayed release of the Company's PowerBraille product
line. The Company had international sales of $8.8 million and $8.9 million in
1994 and 1993, respectively, representing 31.8% and 33.0% of the Company's net
revenue in 1994 and 1993, respectively.
Gross Profit. Gross profit for the year ended December 31, 1994 was $12.3
million, a decrease of $0.1 million or 1.0% from $12.4 million for the year
ended December 31, 1993. Gross margin decreased to 44.4% in 1994 from 45.7% in
1993 due primarily to a decrease in average selling prices of refreshable
braille products as well as an increase in product manufacturing costs
associated with the introduction of the Aladdin in September 1994.
22
<PAGE>
Product Development. Product development expense for the year ended December
31, 1994 was $2.6 million, a decrease of $0.3 million or 9.0% from $2.9
million for the year ended December 31, 1993, representing 9.5% and 10.6% of
net revenue, respectively. The decrease in product development expense from
1993 to 1994 was due primarily to the completion of the development of the
Aladdin during 1994, coupled with cost-savings associated with the
reorganization of the product development departments.
Sales, General and Administrative. Sales, general and administrative expense
was $9.0 million for the year ended December 31, 1994, a decrease of $1.3
million or 12.5% from $10.3 million for the year ended December 31, 1993. This
decrease reflected completion of the amortization relating to the VTEK
acquisition in 1989 and efficiencies achieved as a result of the corporate
restructuring. Sales, general and administrative expense accounted for 32.7%
and 38.0% of net revenue in 1994 and 1993, respectively.
Restructuring. The Company had $0.3 million and $0.5 million of
restructuring charges in 1994 and 1993, respectively. The restructuring
charges in 1994 related to the discontinuation of the Company's manufacturing
and warehousing facility in Ireland and staff reductions at its corporate
headquarters in the United States. These charges were offset in part by a
foreign currency adjustment relating to the valuation of the assets in United
States dollars. The restructuring charges in 1993 related to discontinuing its
German, French and Austrian direct sales subsidiaries and staff reductions in
Europe and the United States.
Income Taxes. Income taxes were $0.3 million for the year ended December 31,
1994, an increase of $0.2 million from approximately $21,000 for the year
ended December 31, 1993. The Company's effective tax rates were 245.9% and
(1.6)% in 1994 and 1993, respectively. The Company's effective tax rate in
1993 differed from the combined statutory rate due to foreign withholding
taxes on royalty revenue.
Net Loss. The Company had a net loss of $0.2 million for the year ended
December 31, 1994 as compared to a net loss of $1.3 million for the year ended
December 31, 1993. Net loss expressed as a percentage of net revenue was 0.6%
and 4.9% in 1994 and 1993, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash generated from operating
activities and borrowings under its bank line of credit and term loans.
Net cash provided from operations totaled $0.5 million and $1.7 million in
1994 and 1995, respectively. The $1.2 million increase in net cash provided by
operations was primarily due to the improved operating results in 1995 as
compared to 1994. Net cash provided from operations for the first six months
of 1996 totaled $1.0 million, versus $1.2 million for the first six months of
1995. The decrease of $0.2 million of net cash provided from operations was
primarily due to the funding of working capital in connection with the
acquisition of SSL and Teletec in March of 1996.
Net cash used in investing activities in each of 1994 and 1995 was
approximately $0.6 million, and was used primarily for the acquisition of
equipment and improvements. In the first six months of 1996, the Company used
$2.1 million for investing activities versus $0.2 million for the first six
months of 1995. For the first six months of 1996, the Company used $1.8
million of net cash for the acquisition of SSL and Teletec and $0.3 million
for the acquisition of equipment and improvements.
Net cash used in financing activities in 1994 and 1995, consisted of $0.4
million and $1.4 million, respectively, primarily for the repayment of funds
previously borrowed under the Company's bank line of credit and repurchase of
the Company's Common Stock. In the first six months of 1996, $1.2 million of
net cash provided by financing activities consisted primarily of borrowings
under the Company's bank line of credit and term loans for the purpose of
funding the Company's acquisition of SSL and Teletec and proceeds from the
issuance of the Company's Common Stock. At June 30, 1996, the Company had $2.2
million of short-term borrowings and current portion of long-term debt, and
$0.7 million of long-term debt outstanding.
23
<PAGE>
At June 30, 1996, the Company's primary sources of liquidity included cash
and equivalents of $0.3 million and available bank borrowings of $1.8 million
under its secured line of credit which bears interest at the bank's prime rate
plus 1.25% and expires on October 1, 1996. At June 30, 1996, $1.7 million was
outstanding under this line of credit. The Company has three term loans which
bear interest at the bank's prime rate plus 1.50% or at a fixed 10% rate and
are due between April 1998 and March 1999. At June 30, 1996, $1.1 million was
outstanding under the term loans. The Company's current bank borrowings are
subject to certain financial covenants including maintenance of minimum levels
of quick ratio, tangible net worth and working capital and maintenance of
maximum levels of the ratio of debt to total net worth, as well as quarterly
net income, and debt service coverage requirements. In addition, the Company
is prohibited from paying dividends without the consent of the bank under the
terms of the agreements. The Company believes that the net proceeds of this
Offering, together with its current cash balances, its credit facility, and
net cash provided by operating activities, will be sufficient to meet its
working capital and capital expenditure requirements for at least the next
twelve months. See "Use of Proceeds."
24
<PAGE>
BUSINESS
GENERAL
Telesensory, founded in 1970, develops, manufactures and markets innovative
electronic and computer-based products to assist people with severe visual
disabilities to achieve greater independence and privacy. The Company is the
leading provider of such products in North America, and one of the two leading
companies worldwide. The Company makes video magnifiers and other electronic
and computer-based assistive devices for people who are severely visually
impaired (the "Low Vision Products") and various braille-related and other
electronic and computer-based assistive devices for those who are totally
blind or without useable light perception (the "Blindness Products").
Low Vision Products accounted for 71% of Company net revenue in 1995. Low
Vision Products consist of video magnifiers and computer screen magnification
systems, which provide a range of magnification, enhanced contrast and field
of view. In 1994, the Company introduced the Aladdin, a highly innovative,
advanced video magnifier. In 1995, the Aladdin won the American Society of
Aging's Gold Award for outstanding product design for mature consumers.
Primarily as a result of the introduction of the Aladdin, unit sales of video
magnifiers increased 53% in 1995, to 11,091 units, and increased 18% in the
first half of 1996 as compared to the first half of 1995. The Company believes
that its sales of video magnifiers, in both units and dollars represented
approximately 55% of the market in the United States in 1995 and significantly
exceeded comparable figures for its competitors.
Blindness Products accounted for 29% of Company net revenue in 1995. The
principal product line consists of refreshable computer-controlled braille
displays that enable blind persons to operate personal computers. Other
products include optical character reading systems with synthesized speech or
braille output, and braille printers. The Company believes that it is one of
the top three manufacturers worldwide in the majority of its Blindness
Products.
INDUSTRY BACKGROUND
Severe visual impairment is defined by the National Center for Health
Statistics as the inability to read ordinary newspaper print even when wearing
glasses or contact lenses. People with such impairments also have difficulty
with daily activities such as reading mail and prescription bottles, balancing
checkbooks, viewing photographs and working with small objects. The number of
people in the United States who are severely visually impaired is estimated at
4.3 million. A much smaller population, estimated at 100,000 in the United
States, is either totally blind or lacks useable light perception. Populations
in other developed countries are believed to exhibit similar rates of visual
impairment. Age-related macular degeneration, which has no known cure, is the
leading cause of visual impairment and currently affects 20% of individuals
over age 65. Other leading causes of visual impairment and blindness include
diabetes and glaucoma.
Working at Stanford University, Telesensory's founders developed an optical-
to-tactile converter called the Optacon, which allowed totally blind people to
read print material. During the same period, VTEK pioneered the use of video
magnifiers for people with severe visual impairment. During a period when
there was little available to technologically assist visually disabled people,
and well before recent legislation such as the ADA, the two companies
significantly enhanced the educational and work opportunities and the private
lives of many tens of thousands of blind and visually impaired people around
the world. In 1989, the Company acquired VTEK.
Historically, a majority of electronic and computer-based assistive devices
were purchased by government agencies and large institutions, including
federal and state rehabilitation agencies as well as schools, universities and
public libraries whose purchases were primarily funded through government
grants. However, the Company believes that recent trends in the United States
are leading to the development of a consumer market that does not rely on
government funding to purchase assistive devices.
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<PAGE>
Disabled people, including those who are visually disabled, are increasingly
seeking to participate fully in workplace, recreational and other daily
activities enjoyed by non-disabled people. In addition, there is an increasing
number of elderly people who experience visual impairment but nevertheless
wish to remain active and independent, and have the means to purchase
assistive devices. In turn, modern society has become more aware of the need
to enhance the quality of lives of disabled people. For example, the ADA
mandates that public facilities and services be accessible to disabled people,
including visually impaired people. The Company believes that these trends
have led to a growing demand for devices to assist visually disabled people.
These trends, combined with reductions in the cost of electronic and computer
technology, are spurring the growth of a consumer market of corporations and
individuals who are financially able to purchase assistive devices without
government assistance.
Despite these trends, the Company believes that only a small percentage of
visually impaired people are familiar with or own electronic access devices.
For example, the Company estimates that annual unit sales of all electronic
and computer-based magnification systems in the United States are made to less
than 0.5% of the 4.3 million people who are severely visually impaired. The
development of stronger consumer demand has been limited by a lack of public
awareness, scarcity of retail outlets offering such devices, the relatively
small proportion of ophthalmologists and optometrists who are familiar with
such devices and previous higher costs for such devices.
BUSINESS STRATEGY
The Company's goal is to be the market leader in the development,
manufacture and marketing of electronic and computer-based assistive devices
for visually impaired individuals. The Company's strategies to reach this goal
include the following:
Expand the Consumer Market for Electronic and Computer-Based Assistive
Devices. The Company's primary strategy is to promote the growth of consumer
markets for its products by increasing consumer awareness and by reducing the
cost of assistive devices. The Company has recently launched a consumer-
directed advertising and promotion campaign, including a radio campaign that
was test marketed in the first quarter of 1996. The Company is increasing the
number of independent distributors and dealers of its products, expanding
distribution through private-label merchandising, increasing the retail
channels for its products and enhancing its relationships with its referral
sources. The Company also believes that lower prices increase the number of
consumers able and willing to purchase assistive devices and increases the
willingness of optometrists and other referral sources to promote assistive
devices to consumers. In 1994, the Company introduced the first high quality,
easy-to-use video magnifier with a retail price of less than $2,000, which it
believes has contributed to a significant increase in unit shipments to
consumers. The Company will continue to seek to develop and introduce lower-
price versions of leading products.
New Product Development. The Company believes that its ability to maintain
market leadership depends upon the continued development of new products. In
1995, the Company spent approximately $2.3 million in product development
activities, which in 1996 resulted in the completion of the Aladdin family of
video magnifiers, the introduction of Super Vista, a hardware-based
magnification system compatible with Windows 95, and a variety of product
enhancements and upgrades in the Blindness Products area. The Company intends
to dedicate significant resources to develop new products.
Reduce Manufacturing Costs. The Company seeks to be the lowest cost producer
in each of its major product areas in order to increase its marketing
flexibility. Accordingly, since the Company's restructuring in 1994, the
Company has dedicated significant resources to reduce its manufacturing costs.
Cost-reduction efforts have included product tooling, product redesign and the
implementation of a continuous flow production line. The Company intends to
continue seeking new ways to reduce manufacturing costs.
Pursue Strategic Acquisitions and Alliances. The Company believes that
fragmentation in the visual assistive devices market offers strategic
opportunities to expand the Company's product lines and distribution
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<PAGE>
channels. The Company recently acquired its distributors in the United Kingdom
and France. The Company intends to continue to pursue acquisitions and
strategic alliances that strengthen the Company's competitive position within
its markets. However, the Company is not currently negotiating any potential
acquisition or strategic alliance, and there is no assurance that the Company
will be able to successfully conclude any such transaction.
Develop New Applications for the Company's Products. The Company believes
that its video magnifier products have applications beyond their traditional
uses for visually impaired individuals. The Company has initiated a program to
explore the application of its video magnifiers to the industrial inspection
market for use in examining small parts for quality control, process
inspection, training and other purposes. The Company will continue to seek
similar opportunities.
PRODUCTS
The Company's innovative electronic and computer-based products help
visually impaired and blind people achieve greater independence and privacy.
The Company's product line is comprised of Low Vision Products and Blindness
Products.
LOW VISION PRODUCTS
Video Magnifiers. The Company's Aladdin family of video magnifiers uses
closed circuit television technology to magnify printed and written material
and small objects from 3x to 50x on a television monitor. Video processing
circuitry enhances viewability of the enlarged image by providing a variety of
contrasts and an improved field of view. The Company introduced the first
Aladdin in September 1994 to replace one of the Company's existing video
magnifier products. The Aladdin family is now comprised of six models:
Aladdin, Aladdin Pro, Aladdin Pro Plus, Aladdin Rainbow, Aladdin Genie and
Aladdin XL. All of the models provide magnification, image enhancement, image
selection and a movable viewing table to facilitate reading large or heavy
materials. The products are available in both monochrome or color, a variety
of magnification ranges and adjustments and other image enhancement features.
Some models can be used in combination with personal computers. The suggested
U.S. retail prices for the Aladdin products range from $1,795 to $3,800. In
1995, the Company sold 11,091 video magnifiers, including both Aladdin and its
predecessor products, representing a 53% increase in units compared with 1994
and followed by an 18% increase in unit sales in the first six months of 1996
over unit sales in the first six months of 1995. The Company estimates that in
1995 it had approximately 55% of the domestic market for video magnifiers.
Computer Display Magnification. Super Vista is a proprietary, hardware-based
PC display magnification system, which works with a variety of computers,
networks and software applications, including Windows 95. Super Vista provides
up to 16x magnification of text and graphics on the monitor without
significantly impairing the performance of the underlying application, or
interfering with normal keyboard or operating platform functions. The
suggested U.S. retail price is $2,495.
BLINDNESS PRODUCTS
Refreshable Braille Display. The Company's PowerBraille (PB) family of
products convert character information from a PC into electronic braille,
which can then be read by the user on a braille display device attached to the
computer as a peripheral. PowerBraille displays operate in virtually any PC-
compatible computer environment, instantly transforming screen information
into 8-dot refreshable braille, using braille cells. The PowerBraille products
are available in 40, 65 or 80 cell linear displays. The PB40 is battery-
powered for portability and is designed to work with laptop personal
computers. The PB65 and PB80 are designed primarily for desktop PCs and
terminals. Suggested U.S. retail prices range from $6,000 to $11,000.
Braille Cells. Braille cells are small arrays of eight pins that can be
electronically raised and lowered by a computer allowing a blind person to
read the character information. The Company utilizes arrays of such cells in
its PowerBraille family of refreshable braille devices and also sells
significant quantities of such cells to other manufacturers who incorporate
the cells into their own products.
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<PAGE>
Optical Character Recognition (OCR) Systems. The Company's OsCaR product is
a specialized screen navigation software product that permits a blind user to
access printed documents. Once a document has been scanned into a computer
using a commercial flatbed scanner, OsCaR enables a blind user to read, edit,
print or retransmit that information using one of the Company's braille output
or speech output products, including a braille embosser. The suggested U.S.
retail price exclusive of the scanner is $995.
Software Programs. ScreenPower for Windows is a software program that
provides tactile and audio access to Microsoft Windows and most commercial
applications running under Windows. This integrated software package operates
in conjunction with a numeric keypad and braille display to allow users to
navigate through graphically-oriented screens. The suggested U.S. retail price
is $995.
Braille Embossers. Braille embossers are mechanical peripheral devices that
produce raised dots on paper using a feed mechanism much like many ordinary
computer printers. The Company offers two versions of braille embossers: a
single-sided version and a double-sided version that embosses simultaneously
at speeds up to 60 characters per second on both sides of the paper. The
suggested U.S. retail prices for the Company's embossers range from $3,000 to
$4,000.
Library Access Products. Variations of the Company's screen enlarger and
speech output products, named VView and VVoice, are sold to library equipment
suppliers of electronic catalog access systems. Those suppliers incorporate
these products into their public-access catalog systems so that visually
impaired and totally blind library patrons can have effective and equal access
to the library's catalog system.
PRODUCT DEVELOPMENT
The Company's engineering and product development activities are performed
by its 22 person product development staff. There are separate product
development groups for the Company's Low Vision Products and Blindness
Products, each of which is comprised of one department manager, one or more
section managers, engineering professionals, and technical and administrative
support staff. In addition, the Company's product development efforts are
supplemented by consultants, designers and engineering firms with specialized
expertise.
The Company's expenditures in 1995 for engineering and product development
totaled approximately $2.3 million, which represented 7.4% of revenues. The
Company has a history of successful product innovation, including the Aladdin
family of video magnifiers and the Super Vista and PowerBraille product lines.
The Company intends to dedicate significant resources to product development
for the foreseeable future. However, there can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of new or enhanced products
or that such products will achieve market acceptance.
CUSTOMERS
Currently, more than 90% of the Company's net revenue is derived from sales
to the Company's worldwide distributors and dealers. No single customer,
distributor or dealer accounts for more than 10% of the Company's net revenue.
In the United States, a growing percentage of the Company's Low Vision
Products sales, estimated at approximately 55%, are made directly and through
its distributors and dealers to employers and individuals who purchase the
Company's products with their own funds or whose family members purchase the
Company's products for them. The balance of the Company's Low Vision Products
sales in the United States are made primarily to traditional purchasers of
products for visually impaired individuals, including various government
agencies and institutions, schools and universities, libraries and screening
clinics. Because of the growing importance of the consumer market segment, the
Company has devoted increasing attention to consumer-oriented marketing
initiatives, including radio advertising. There is no assurance that these
marketing activities will be successful. See "Risk Factors -- Failure to
Expand Consumer Market."
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Blindness Products sales both in the United States and internationally are
made primarily to the same traditional purchasers who purchase Low Vision
Products, including various government agencies and institutions, schools and
universities, libraries and screening clinics.
In 1995, international sales represented approximately 35% of net revenue.
The division between government and private sector purchases of both LowVision
Products and Blindness Products varies from country to country.
Approximately 8% of the Company's net revenue is derived from sales of its
products to OEMs, which purchase the Company's products for use in finished
goods of their own design and manufacture or who purchase the Company's
finished products under private-label arrangements. In certain cases, the
Company's OEM customers manufacture products that compete with the Company's
products.
SALES, DISTRIBUTION AND MARKETING
The Company believes that it has the largest worldwide distributor and
dealer network of any company marketing assistive devices to severely visually
impaired people.
For distribution of its Low Vision Products, the Company utilizes a network
of approximately 110 United States and 30 international distributors and
dealers, of which two are owned by the Company (in the U.K. and France) and
the rest are independent. This distributor network is managed by seven
employee sales managers who assist the independent distributors and dealers in
their sales and marketing activities. The Company's distributors and dealers
are generally assigned exclusive territorial rights or exclusive market
rights, subject to various contractual limitations.
For distribution of its Blindness Products in the United States, the Company
utilizes a combination of six employee salespeople and approximately 37
independent non-exclusive dealers. The employee salespeople sell the Company's
products to customers directly and also offer sales and marketing assistance
to the Company's independent dealers. Internationally, the Company generally
distributes its Blindness Products through the same exclusive distributors who
handle the Company's Low Vision Products.
The Company's distribution agreements are generally terminable by either
party on three to 12 months notice. A majority of the Company's distributors
and dealers have distributed the Company's products for more than five years.
The Company believes that its long-standing relationships with its
distributors, together with the marketing experience gained by these
distributors over the years, have significantly contributed to the Company's
success.
As part of its mix of marketing strategies, the Company and its dealers and
distributors maintain close working relationships with many low vision
clinics, blindness service agencies, rehabilitation organizations,
ophthalmologists, optometrists and others who are service providers,
rehabilitation counselors or similar advisors to people with visual problems.
A significant amount of the Company's business is derived from referrals from
such people, organizations and agencies. A loss of a significant number of
these collaborative relationships or the loss of one or more distributors or
dealers could adversely affect sales of the Company's products, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Many of the Company's marketing activities are aimed at stimulating end-user
demand. These include active trade-show participation on a national level and
support to local distributors for regional and local exhibitions. The Company
publishes a variety of periodical publications that provide information about
products, prices and other matters for consumers, rehabilitation professionals
and the Company's field sales representatives. Toll-free numbers provide
visually impaired clients as well as rehabilitation professionals with free
access to Company staff for product information, order information and
technical support. Print advertising is very limited, because many of the
Company's prospective customers are unable to read print media, but the
Company has a major program in place for local-market radio advertising for
its Low Vision Products. Much of
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<PAGE>
the Company's product literature, periodical publications and user manuals for
Blindness Products are available on computer disk, in braille, on audio
cassette, and in print.
CUSTOMER SERVICE AND SUPPORT
The Company believes that because of its size and status as one of the
world's two largest manufacturers of electronic and computer-based assistive
devices for visually impaired people, the Company is able to provide a level
of marketing and service that cannot be matched by its smaller competitors.
In the United States, the Company conducts training programs at the
Company's facilities for new distributors supplemented by follow-up meetings
with the Company's regional sales managers. The Company also maintains a
customer support department to handle inquiries and questions regarding its
products, and a technical service department that either directs a customer to
a nearby field service center or repairs or replaces defective products. There
are approximately 35 field service centers across the country for Low Vision
Products. Most equipment service for Blindness Products is conducted at the
Company's headquarters. In the United States, all of the Company's products
are covered by limited warranties ranging from one to five years and a 30-day
unconditional money-back guarantee. International distributors are required to
develop and maintain an appropriately stocked equipment service and repair
facility. Products are usually shipped to these distributors with an "out-of-
box" warranty only, which covers costs of repair required immediately upon
delivery. Thereafter, warranty obligations to the distributors' customers are
solely the functional and economic responsibility of the international
distributors.
COMPETITION
The Company competes on the basis of several factors, including product
features, price, customer service and support and the strength of its
relationships with its referral sources.
The Company competes worldwide with a number of manufacturers and
distributors of electronic and computer-based assistive devices for people
with severe visual disabilities. The Company's principal competitors based in
the United States include Optelec, Inc., HumanWare, Inc., Xerox Assistive
Technologies (a division of Xerox Corporation) and Arkenstone, Inc. The
Company's principal competitors based outside the United States include Tieman
B.V., Alva B.V., Reinecker GmbH, Metec GmbH, Low Vision International, KGS and
Pulse Data International.
Most of these companies compete with the Company on a worldwide basis, and
some of these companies have substantially greater financial and operating
resources than the Company. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products that offer superior price or features than the Company's
products. Furthermore, there is no assurance that other companies will not
develop and market alternative technological approaches for meeting the needs
of severely visually impaired and blind people. Some of the Company's markets
have low cost barriers to entry, and there can be no assurance that other
companies that are not currently competitors of the Company will not enter the
Company's markets. In addition, the Company's competitors outside the United
States have cost structures and product prices based on foreign currencies.
Accordingly, currency fluctuations could cause the Company's dollar-priced
products to be less competitive than competitors' products priced in other
currencies. Currency fluctuations could also increase the Company's costs
relative to those of its competitors, which could make it more difficult for
the Company to maintain its competitiveness in such foreign markets.
Additionally, certain foreign countries that offer reimbursement for assistive
devices favor local manufacturers, which could limit the Company's ability to
compete successfully in those countries. Furthermore, the Company believes
that a number of companies may be currently researching and testing various
medical treatments and procedures to reduce the incidence of severe visual
impairment or arrest vision deterioration. In the event such treatments or
procedures prove to be effective, demand for the Company's products could be
reduced, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
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MANUFACTURING
All of the Company's manufacturing operations are located in its facilities
in Mountain View, California. Manufacturing consists of assembly of components
and subcomponents, and final product testing. The components that the Company
purchases include electronic, mechanical, plastic and optical parts, the great
majority of which have been designed exclusively for the Company. Where
feasible, subassemblies such as circuit boards are assembled by contract
manufacturers. In certain instances the Company is dependent upon a sole
supplier or a limited number of suppliers, or has qualified only a single or
limited number of suppliers, for certain key components or sub-assemblies
utilized in its products. This involves certain risks to the Company. See
"Risk Factors -- Dependence on Limited Sources of Supply; Manufacturing
Risks." In addition, some of the Company's manufacturing facilities, equipment
and operations are subject to periodic inspection by various regulatory
authorities, including inspections for good manufacturing practices ("GMP")
compliance by the Food and Drug Administration ("FDA") and comparable state
agencies. Failure to comply with GMP or any other manufacturing requirement
could result in the issuance of warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production and criminal prosecution.
In 1995 the Company implemented a continuous flow manufacturing process for
its video magnifiers, which significantly increased the Company's
manufacturing capacity, reduced cycle time and lowered manufacturing costs.
Consequently, the Company believes that its existing manufacturing facilities
are adequate to handle at least three times current production volumes.
PATENTS AND PROPRIETARY RIGHTS
The Company has two issued patents, neither of which is believed to provide
significant protection against competition. There can be no assurance that
competitors, some of which have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets. Furthermore, the laws of certain foreign countries do
not protect the Company's intellectual property rights to the same extent as
do the laws of the United States. Litigation or regulatory proceedings, which
could result in substantial cost and uncertainty to the Company, may also be
necessary to enforce intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. One
competitor of the Company has claimed that the Company and several of the
Company's competitors are violating both a United States and a European patent
with respect to a function of the Company's PowerBraille product. The patent
holder has been making these claims for more than three years, but has not yet
filed any legal action against either the Company or, to the Company's
knowledge, against any other company with respect to their allegations of
patent infringement. The Company believes the claims are without merit and
intends to vigorously contest the allegations that it is infringing the
subject patent. However, there can be no assurance that the Company will be
able to successfully defend itself from this or any other allegation of
infringement or claims of invalidity. It is also possible that the Company may
need to acquire licenses to, or contest the validity of, issued or pending
patents of third parties relating to the Company's technology. There can be no
assurance that any of such licenses would be made available to the Company on
acceptable terms, if at all, or that the Company, if it were to contest the
validity of any issued or pending patents, would prevail. In addition, the
Company could incur substantial costs in defending itself in suits brought
against the Company on its patents or in bringing suits against third parties.
The Company primarily relies on trade secret or proprietary process
protection, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements with its employees and
consultants. There can be no assurance that the proprietary information or
confidentiality agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets and
proprietary know-how will not otherwise become known to or be independently
developed by others. Furthermore, there can be no assurance that other
companies with significantly greater financial resources will not enter the
Company's markets.
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GOVERNMENT REGULATION AND SAFETY REQUIREMENTS
In the United States, many of the Company's products are regulated as
medical devices by the FDA under the Federal Food, Drug, and Cosmetic Act. The
Company's products, are exempt from the 510(k) premarket notification process.
However, the Company is required to register as a medical device manufacturer
with the FDA and state agencies such as the California Department of Health
Services, to list its products with the FDA and to adhere to applicable FDA
regulations regarding GMPs, which include testing, control and documentation
requirements. The Company is also regulated by the FDA under the Radiation
Control for Health and Safety Act, which requires companies who produce
electronic products to comply with certain standards, including design and
operation requirements, and to certify product labeling and submit reports to
FDA that their products comply with such standards. A failure of the Company
to comply with GMP or any other applicable requirement, could result in the
issuance of warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production and criminal
prosecution, any one of which would have a material adverse effect on the
Company's business, financial condition and results of operations. On August
16, 1996, the Company was notified by the FDA that its testing program for
certifying some of its video magnifier products was not in compliance with the
U.S. Federal Performance Standard for Television Receivers, 21 CFR 1020.10,
and was therefore disapproved which required a suspension of shipment of
certain products. Upon presentation of additional information to the FDA, the
disapproval was rescinded on August 23, 1996. The FDA also advised the Company
that certain video magnifier units shipped prior to August 1995 did not have
the required certification labels affixed to them and, therefore, that
purchaser notification and corrective action might be required. The Company
submitted an application for exemption from notification requirements. The FDA
has advised the Company that it will not act on this application until the
Company has tested a representative sample of such previously-shipped units to
determine if they are in compliance with the applicable performance standards.
The Company is obligated to complete such testing and to provide the requested
information to the FDA by November 10, 1996. The Company believes that all of
its previously-shipped video magnifier products are in compliance with
applicable performance standards, and therefore it is very unlikely that any
further action will be required. However, if the FDA denies the Company's
application and requires notification to consumers, it could have a material
adverse effect on the Company's business, financial condition and results of
operations. Regulations regarding the manufacture and sale of the Company's
products are subject to change, and there can be no assurance that the
Company's current or future products will continue to be exempt from the
510(k) premarket notification process. If the Company's products were to
become subject to the 510(k) premarket notification process or the more
rigorous premarket approval (PMA) process, the Company could experience
substantial cost increases, including product development costs, as well as
substantial delays in new product introductions, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain clearance or approval for sale internationally may be
longer than that required for FDA clearance or approval, and the requirements
may differ. The Company has obtained the certifications necessary to enable
the "CE" mark to be affixed to the Company's products that are sold in Europe,
effective January 1996. The CE mark is a symbol indicating that the product
complies with applicable European electronic device directives. All Company
products sold in Europe will also conform with the Low Voltage Directive
requirement, which is effective January 1997.
REIMBURSEMENT AND THIRD-PARTY PAYMENT
In the United States, the purchase of the Company's products is typically
not covered by private health insurance or reimbursable under Medicare or
other publicly-funded insurance programs. However, federal block grants,
augmented by state funding, are generally available to state rehabilitation
and education agencies to purchase the Company's products and there is also
some support from corporate employers, who purchase assistive devices for
employees. European insurance programs are generally much more comprehensive
than United States programs and will often provide reimbursement for the
procurement of the Company's products for rehabilitation, education and
personal use.
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A significant portion of the Company's net revenue is derived from sales to
institutions and agencies that are dependent on government funding. In recent
years, primarily as a result of budget constraints, the level of government
funding has been subject to wide fluctuations, which has had an adverse effect
on the Company's business, financial condition and results of operations. If
government funding were to be reduced in the future, it would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Government Funding and Reimbursement."
EMPLOYEES
As of June 30, 1996, the Company and its subsidiaries had 179 full-time
employees, including 69 in manufacturing operations, 63 in sales and
marketing, 22 in product development and 25 in finance and administration. Six
of the Company's employees are blind or severely visually impaired. Of the
Company's employees, 20 are located in Europe. The Company also employs from
time to time a number of temporary and part-time employees as well as
consultants on a contract basis. The Company's future success will depend in
part on its ability to attract, train, retain and motivate highly qualified
employees, who are in great demand. There can be no assurance that the Company
will be successful in attracting and retaining such personnel. The Company's
employees are not represented by any collective bargaining organization and
the Company has not experienced a work stoppage or strike. The Company
considers its employee relations to be good. See "Risk Factors -- Dependence
on Key Personnel" and "-- Management of Growth."
FACILITIES
The Company leases approximately 68,000 square feet in two adjacent
buildings in Mountain View, California under a five-year lease, which expires
in December 1997. These facilities serve as the Company's headquarters and
include all Company functions except international distribution.
Sensory Systems, Ltd, the Company's wholly-owned United Kingdom subsidiary,
leases approximately 3,100 square feet in London, England, under a ten-year
lease, which expires in June 2003. SSL's obligations under the lease are
guaranteed by the Company.
Teletec SARL, the Company's wholly-owned French subsidiary, leases
approximately 1,500 square feet in Paris, France under a nine-year lease,
which expires in April 2002.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company as of June 30, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry Israel............... 56 President, Chief Executive Officer and Chairman
of the Board
Robert W. Kamenski......... 41 Chief Financial Officer, Vice President, Finance
and Administration, Treasurer and Secretary
Yakov Soloveychik.......... 49 Vice President and General Manager, Blindness
Products Division, and Assistant Secretary
Marc J. Stenzel............ 45 Vice President and General Manager, Low Vision
Products Division
John F. Tillisch........... 44 Vice President, European Operations
Timothy S. Couture......... 40 Vice President, Engineering, Low Vision Products
Division
Ronald C. Odell............ 38 Vice President, Operations, Low Vision Products
Division
Mitchell Gooze (2)......... 44 Director
John F. Harper (1)......... 46 Director
Seymour Liebman (2)........ 46 Director
John M. Lillie (1)......... 59 Director
John G. Linvill............ 76 Director
Peter D. Stent (2)......... 53 Director
</TABLE>
- ----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee.
Larry Israel has been President and Chief Executive Officer of the Company
since July 1995. In June 1996, he was elected Chairman of the Board of
Directors. Prior to holding these positions, he served as the Company's Vice
President, Sales and Marketing from January 1994 to July 1995 and Vice
President, Sales from July 1993 to January 1994. Mr. Israel founded VTEK in
1971. VTEK was acquired by the Company in January 1989, at which time he
became a member of the Company's Board of Directors. Between July 1989 and
July 1993 Mr. Israel did not maintain full-time employment. Mr. Israel holds a
B.S. in Electrical Engineering from Worcester Polytechnic Institute and a J.D.
from Golden West University, and is an active member of the California Bar.
Robert W. Kamenski has been the Company's Chief Financial Officer and Vice
President, Finance and Administration since December 1995. From February 1995
to December 1995, he served as the Company's Vice President, Finance and
Accounting. From July 1992 until February 1995, he served as the Company's
Controller. From October 1990 to February 1992, he held various positions at
Tandem Computers, a computer manufacturer, most recently as Manager of
Financial Planning and Analysis. Mr. Kamenski holds a B.A. in Accounting from
the University of Wisconsin-Milwaukee and is a member of the American
Institute of Certified Public Accountants.
Yakov Soloveychik returned to the Company in September 1994 as Vice
President and General Manager, Blindness Products Division. He was Vice
President Operations of VTEK at the time of the merger in 1989, and continued
with the Company for approximately one year thereafter as Vice President
Engineering and New Product Development. From 1990 to September 1994, Mr.
Soloveychik served as President and Chief Executive Officer of AccessAbility
Technologies, Inc., the U.S. distributor for Baum Products GmbH, a German
manufacturer of electronic and computer-based assistive products for blind
people. Mr. Soloveychik holds an M.S.E.E. in Electrical Engineering from Riga
Polytechnic Institute, Latvia.
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Marc J. Stenzel has been with the Company since 1985 in a variety of
positions, most recently as Vice President and General Manager, Low Vision
Products Division. From July 1994 to March 1996, he served as the Company's
Vice President, Sales and Marketing. From October 1993 to July 1994 he served
as a National Sales Manager, and from August 1991 to October 1993 he served as
a National Account Manager for the Company. Mr. Stenzel holds a B.A. in
Psychology and a B.A. in Management and Accounting from the State University
of New York at Buffalo.
John F. Tillisch became Vice President, European Operations in April 1996.
From July 1983 to March 1996, Mr. Tillisch was the sole shareholder and
Managing Director of Sensory Systems, Ltd., a European distributor of the
Company's products that was acquired by the Company in March 1995. Mr.
Tillisch holds a B.A. in French and Russian from Keele University, England.
Timothy S. Couture joined the Company in September 1991 and has been Vice
President, Engineering, Low Vision Products Division since August 1994. Prior
to his most recent appointment, Mr. Couture held various positions with the
Company, most recently as Director of Engineering from February 1993 to August
1994. Mr. Couture holds an A.S. Degree in Electronics from Foothill College.
Ronald C. Odell has been the Company's Vice President, Operations, Low
Vision Products Division, since July 1994. Mr. Odell has held a variety of
positions within the Company including Director of Manufacturing for both Low
Vision Products and Blindness Products from February 1993 to July 1994 and
Director of Production Control from 1991 to 1993. From 1985 through the merger
of VTEK with the Company in 1989, Mr. Odell held various positions with VTEK.
Mitchell Gooze has been a director of the Company since 1995. Since 1991, he
has served as President of The OMT Group, a marketing and sales consulting
firm based in Santa Clara, California. Mr. Gooze holds a B.S. in Engineering
from the University of California at Los Angeles.
John F. Harper has been a director of the Company since 1995. Since November
1995 he has served as President and Chief Executive Officer of Indigo Medical,
a medical device company in Palo Alto, California. From June 1995 to November
1995 he was an independent business consultant. From February 1994 to June
1995 he was the President and Chief Executive Officer of Menlo Care, Inc., a
medical device company. From June 1991 to February 1994 he served as Vice
President, Sales and Marketing of Menlo Care, Inc. Mr. Harper holds a B.A. in
Economics from Davidson College.
Seymour Liebman has been a director of the Company since 1993. Since 1974,
he has held a variety of positions with Canon U.S.A., Inc., a manufacturer of
consumer electronics and a subsidiary of Canon Inc., most recently as
Executive Vice President and General Counsel. He is also a director of Zygo
Corporation, a public company. Mr. Liebman holds a B.A. in Mathematics from
Hofstra University, an M.S. in Mathematics from Rutgers University, an M.A. in
Accounting from C.W. Post and a J.D. from Touro Law School.
John M. Lillie became a director of the Company in 1996. Since October 1995,
he has served as Chairman of the Advisory Board of and a consultant to
Specialized Bicycle Components in Morgan Hill, California, a designer and
distributor of bicycles and accessories. From August 1990 to October 1995, he
held various positions with American President Companies, a containerized
freight transporter, most recently as its Chairman of the Board and Chief
Executive Officer. Mr. Lillie is also on the Board of Directors for The GAP
Inc. and Von's Inc., both public companies. Mr. Lillie also serves on Stanford
University's Board of Trustees. Mr. Lillie holds a B.S. and an M.S. in
Industrial Engineering and an M.B.A. from Stanford University.
John G. Linvill is a co-founder of the Company and has served as a director
of the Company since its inception. He was Chairman of the Board from 1984 to
June 1996, at which time he became Chairman Emeritus. Since 1991, he has
served as a director on the Board of Read-Rite Corporation, a public company.
Since 1955, he has been a member of the Stanford University faculty, currently
as Professor of Engineering, Emeritus. He has also served as Chairman of the
Electrical Engineering Department and Director of the Center for Integrated
35
<PAGE>
Systems at Stanford University. Dr. Linvill received a B.S. in Mathematics and
Physics from William Jewell College and an S.c.D in Electrical Engineering
from the Massachusetts Institute of Technology.
Peter D. Stent has been a director of the Company since 1993. Since 1983, he
has managed investments as a general partner at Rubicon Ventures, a venture
capital firm. Mr. Stent holds an M.A. in Agricultural Economics and Business
Administration from the University of California at Berkeley and a B.A. in
Range Management from the University of California at Davis.
DIRECTOR COMPENSATION
Until June 1996, each non-employee member of the Company's Board of
Directors was granted an annual non-qualified stock option pursuant to the
Company's 1985 Stock Plan, or more recently the Company's 1995 Stock Plan, to
purchase 5,000 shares of the Company's Common Stock as partial consideration
for services as a director, with periodic vesting over a five year period.
Pursuant to a policy of the Board of Directors adopted in June 1996, each
non-employee director will automatically be granted a nonstatutory stock
option under the Company's 1995 Stock Plan to purchase 12,500 shares of Common
Stock on the date which such person first becomes a non-employee director and
an option to purchase 3,750 shares of the Company's Common Stock on the date
such non-employee director is re-elected to the Board, provided that such non-
employee director became a member of the Board prior to January 1 of the year
in which such director is reelected. See "--Stock and Employee Benefit Plans."
Each non-employee director also receives cash compensation at the rate of
$800 for each Board meeting attended in person, $400 for each committee
meeting attended in person, and half of these rates for Board or committee
meetings attended telephonically.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee consists of Messrs. Gooze, Liebman
and Stent. Mr. Stent serves as Chairman of the Compensation Committee. There
are no interlocking relationships, as described by the Securities and Exchange
Commission, among any of the Compensation Committee members.
36
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended December 31, 1995
compensation awarded to, paid to or earned by (i) the Company's Chief
Executive Officer and (ii) the Company's four most highly compensated
executive officers whose salary and bonus exceeded $100,000 during the fiscal
year ended December 31, 1995 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- -------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(1)(#) (2)($)
--------------------------- ---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Larry Israel
Chairman, President and Chief
Executive Officer............ 198,810 231,601 125,000 5,160
Yakov Soloveychik
Vice President and General
Manager, Blindness Products
Division..................... 131,728 39,890 18,750 250
Marc J. Stenzel
Vice President and General
Manager, Low Vision Products
Division..................... 116,731 43,426 12,500 5,447
Ronald C. Odell
Vice President, Operations,
Low Vision Products
Division..................... 96,990 38,220 12,500 5,535
Timothy S. Couture
Vice President, Engineering,
Low Vision Products
Division..................... 101,888 39,241 12,500 6,700
</TABLE>
- --------
(1) Represents options granted pursuant to the 1985 Incentive Stock Option
Plan and the 1993 Stock Option Plan. See description under "Stock and
Employee Benefit Plans."
(2) The amounts described hereunder were paid by the Company for premiums on
group term life insurance and medical and dental insurance.
37
<PAGE>
STOCK OPTION GRANTS
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended December
31, 1995. All such options were awarded under the Company's 1985 Incentive
Stock Option Plan, except for the options granted to Mr. Israel, which were
awarded under the 1993 Stock Option Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN PER EXPIRATION ----------------------
NAME GRANTED(#)(1) FISCAL YEAR(2)(%) SHARE(3)($) DATE 5%($) 10%($)
- ---- ------------- ----------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Larry Israel............ 125,000(5) 30.84 2.64 3/22/00 52,884 153,153
Yakov Soloveychik....... 18,750 4.63 2.40 3/10/05 28,300 71,718
Marc J. Stenzel......... 12,500 3.08 2.40 3/10/05 18,867 47,812
Ronald C. Odell......... 12,500 3.08 2.40 3/10/05 18,867 47,812
Timothy S. Couture...... 12,500 3.08 2.40 3/10/05 18,867 47,812
</TABLE>
- --------
(1) The stock options granted in the fiscal year ended December 31, 1995
pursuant to the 1985 Incentive Stock Option Plan are exercisable at a rate
of 3% per month, with full vesting occurring thirty-three months after the
date of grant. Under the 1985 Incentive Stock Option Plan, the Board
retains the discretion to modify the terms, including the price, of
outstanding options.
(2) Based on an aggregate of 405,369 options granted by the Company during the
year ended December 31, 1995 to non-employee directors, employees of and
consultants to the Company, including the Named Executive Officers.
(3) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by the Board of Directors on
the date of grant, except options granted to Larry Israel, which were
granted at an exercise price of 110% of the fair market value on the date
of grant.
(4) Potential realizable value is based on the assumption that the fair market
value of the Common Stock of the Company appreciates at the annual rate
shown (compounded annually) from the date of grant until the expiration of
the option term. These numbers are calculated based on the requirements
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth.
(5) The stock options granted to Mr. Israel are exercisable at the following
rate: In 1995, 3,473 shares become exercisable each month until such time
as 31,253 shares have vested; in 1996, 3,473 shares become exercisable
each month until such time as 36,473 shares have vested; in 1997, 3,473
shares become exercisable each month until such time as 37,878 shares have
vested and in 1998, 3,473 shares become exercisable each month until all
shares under the option grant have become exercisable.
38
<PAGE>
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information regarding the exercise of
stock options by the Named Executive Officers during the fiscal year ended
December 31, 1995 and stock options held as of December 31, 1995 by the Named
Executive Officers.
OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE DECEMBER 31, 1995(#) DECEMBER 31, 1995($)(2)
ON EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larry Israel............ 2,750 0 37,553 95,323 351,496 892,223
Yakov Soloveychik....... -- -- 11,363 22,388 109,085 214,925
Marc J. Stenzel......... -- -- 10,550 13,825 101,280 132,720
Ronald C. Odell......... -- -- 7,425 13,825 71,280 132,720
Timothy S. Couture...... 5,000 0 9,625 9,125 92,400 87,600
</TABLE>
- --------
(1) Market value of underlying securities at date of exercise less the
exercise price.
(2) Based on a value of $12.00 per share, the assumed initial public offering
price, less the per share aggregate option price shown in the option grant
table, multiplied by the number of shares underlying the option.
EMPLOYMENT AGREEMENT
SSL entered into an employment agreement with John F. Tillisch in March 1996
in connection with the Company's acquisition of SSL. Mr. Tillisch's agreement
extends through March 1999 and provides that he will initially serve as SSL's
Managing Director. The agreement establishes his salary at (Pounds)70,000 for
the first year after the effective date of the agreement, (Pounds)73,000 for
the second year and (Pounds)77,000 for the third year, subject to an annual
adjustment upward at the discretion of SSL. The agreement also provides that
SSL will pay Mr. Tillisch a bonus equal to one-third of the excess of pre-tax
income of SSL over (Pounds)322,500 in each of the fiscal years ending December
31, 1996, December 31, 1997 and December 31, 1998, up to an aggregate total
bonus of (Pounds)225,800. At March 29, 1996 the exchange rate was $1.53 per
pound sterling.
STOCK AND EMPLOYEE BENEFIT PLANS
1985 Incentive Stock Option Plan. The Company's 1985 Incentive Stock Option
Plan (the "1985 Plan") was adopted by the Board of Directors and approved by
the shareholders in 1985. The 1985 Plan expired in March 1995, and no further
options have been or will be granted under the 1985 Plan. The 1985 Plan
provides for the grant to employees (including officers and employee
directors) of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and the grant of nonstatutory stock
options to employees (including officers), directors and consultants. As of
June 30, 1996, options to purchase 202,500 shares of Common Stock at a
weighted average exercise price of $2.41 per share were outstanding. The
exercise price of all incentive stock options granted under the 1985 Plan must
be at least equal to the fair market value of the shares on the date of grant.
Generally, options granted to employees and consultants under the 1985 Plan
vest and become exercisable at a rate of 3% of the shares subject to the
option per month subject to modification by the Board of Directors. The
maximum term for options granted under the 1985 Plan is ten years.
1993 Stock Option Plan. The Company's 1993 Stock Option Plan (the "1993
Plan") was adopted by the Board of Directors in June 1993 and approved by the
shareholders in August 1993. The purposes of the 1993 Plan are to attract and
retain the best available senior executive officers and to promote the success
of the Company's business. Options granted under the 1993 Plan may be either
incentive stock options as defined in Section 422 of the Internal Revenue Code
of 1986, as amended, or non-statutory stock options, at the discretion of the
Board. Options may be granted only to the Chief Executive Officer, President
and any Vice President
39
<PAGE>
reporting directly to the Chief Executive Officer or the President and
Secretary of the Company. A total of 250,000 shares of Common Stock have been
reserved for issuance under the 1993 Plan.
The 1993 Plan is currently administered by the Board of Directors, which
determines the terms of the options granted under the 1993 Plan, including the
exercise price, number of shares subject to the option and the exercisability
thereof, as well as the fair market value of the Common Stock. The term of
each option is ten years from the date of grant unless a shorter term is
provided in the stock option agreement. However, the terms of all incentive
stock options and nonstatutory stock options granted to an optionee who, at
the time of grant, owns stock representing more than 10% of the voting rights
of the Company's outstanding capital stock, may not exceed five years. No
option granted under the 1993 Plan may be transferred by the optionee other
than by will or the laws of descent or distribution and each option may be
exercised, during the lifetime of the optionee, only by such optionee. In the
event of a merger of the Company with or into another corporation, each option
shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation.
In the event that such successor corporation does not agree to assume such
options or to substitute equivalent options, the optionee shall have the right
to exercise the option as to all of the shares of Common Stock, including
shares as to which the option would not otherwise be exercisable.
The per share exercise price of non-statutory options granted under the 1993
Plan shall be no less than 85% of the fair market value per share on the date
of grant. In the case of an option granted on or after the effective date of
registration of any class of equity security of the Company pursuant to
Section 12 of the Exchange Act and prior to six months after the termination
of such registration, the per share exercise price shall be no less than 100%
of the fair market value per share on the date of grant.
For incentive stock options, with respect to any senior executive officer
who, at the time of the grant of such incentive stock option, owns stock
representing more than 10% of the voting power of all classes of stock of the
Company or any parent or subsidiary, the per share exercise price shall be no
less than 110% of the fair market value per share on the date of grant. With
respect to any other senior executive officer, the per share exercise price
shall be no less than 100% of the fair market value per share on the date of
grant. No incentive stock option may be granted to a senior executive officer
which, when aggregated with all other incentive stock options granted to such
senior executive officer by the Company or any parent or subsidiary, would
result in shares having an aggregate fair market value (determined for each
share as of the date of grant of the option covering such share) in excess of
$100,000 becoming first available for purchase upon exercise of one or more
incentive stock options during any calendar year.
As of June 30, 1996, options to purchase 180,000 shares of Common Stock at a
weighted average exercise price of $3.61 were outstanding under the 1993 Plan.
The Plan expires in 2003, unless sooner terminated by action of the Board of
Directors.
1995 Stock Plan. The Company's 1995 Stock Plan (the "1995 Plan") was adopted
by the Board of Directors and approved by the shareholders in May 1995. In
June 1996, the Board and the shareholders approved an amendment to the 1995
Plan to increase the number of shares reserved for issuance thereunder from
250,000 to 500,000. In July 1996, the Board and the shareholders approved a
further amendment to the 1995 Plan to increase the number of shares of Common
Stock reserved for issuance thereunder from 500,000 to 750,000, and to make
certain other changes to comply with Section 16 of the Exchange Act and
current tax law. The purposes of the 1995 Plan are to attract and retain the
best available personnel for positions of substantial responsibility, to
provide additional incentive to employees and consultants of the Company and
its subsidiaries and to promote the success of the Company's business.
Incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, may be granted to employees (including
employee directors) under this Plan. Non-statutory stock options and stock
purchase rights may be granted to employees, directors and consultants.
The 1995 Plan is administered by the Compensation Committee of the Board of
Directors which has the authority to determine the terms of the options and
stock purchase rights granted. In the event of option grants or
40
<PAGE>
stock purchase rights awarded to directors of the Company, the administration
of such grants or awards must comply with Rule 16 promulgated under the
Exchange Act. Terms include, but are not limited to the exercise price, the
number of shares subject to an option and the exercisability thereof. Each
option has a term specified in its option agreement, however, no term can
exceed ten years from the date of grant. In the case of an incentive stock
option granted to an optionee who, at the time the option is granted, owns
stock representing more than ten percent of the voting power of all classes of
stock of the Company or any parent or subsidiary, the term of the option is
five years from the grant date or the term provided in the option agreement,
whichever is less. No option granted under the 1995 Plan may be transferred by
the optionee other than by will or the laws of descent or distribution and
each option may be exercised, during the lifetime of the optionee, only by
such optionee. In the event of a merger of the Company with or into another
corporation, each outstanding option or stock purchase right shall be assumed
or an equivalent option or right shall be substituted by the successor
corporation. In the event that such successor corporation does not agree to
assume such options or to substitute equivalent options, the optionee shall
have the right to exercise the option as to all of the shares of Common Stock,
including shares as to which the option would not otherwise be exercisable.
The exercise price of all incentive stock options granted under the 1995
Plan must be no less than 100% of the fair market value per share on the date
of grant. In the case of non-statutory stock options, the per share exercise
price may be no less than 85% of the fair market value per share on the date
of grant. With respect to employees who own stock representing more than ten
percent of the voting rights of the Company's outstanding stock, the exercise
price of any option granted must be no less than 110% of the fair market value
per share on the date of grant. Each option shall be designated in the written
option agreement as either an incentive stock option or a non-statutory stock
option. However, to the extent that the aggregate fair market value of shares
subject to an optionee's incentive stock options, which become exercisable for
the first time during any year exceeds $100,000, such excess options shall be
treated as non-statutory stock options.
As of June 30, 1996, 240,994 shares were subject to outstanding options at a
weighted average exercise price of $2.99 per share. The 1995 Plan will expire
in 2005 unless terminated at an earlier date by action of the Board of
Directors.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Board of Directors and approved by
the Company's shareholders in July 1996. The Purchase Plan is intended to
qualify under Section 423 of the Internal Revenue Code of 1986, as amended. A
total of 125,000 shares of Common Stock has been reserved for issuance under
the Purchase Plan. The Purchase Plan has offering periods of approximately
twelve months, commencing on or after each December 1. The Purchase Plan is
administered by the Compensation Committee of the Board of Directors. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of an employee's compensation. No
employee may purchase more than $25,000 worth of Common Stock in any calendar
year. Employees are eligible to participate if they are employed by the
Company or a subsidiary of the Company designated by the Board of Directors
for at least 20 hours per week and have been so employed for more than five
months in a calendar year. The price of stock purchased under the Purchase
Plan is 85% of the lower of (i) the fair market value of the Common Stock at
the beginning of the offering period or (ii) the fair market value of the
Common Stock at the end of the offering period. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the
Company.
401(k) Plan. Effective January 1984, the Company adopted the Telesensory
401(k) Retirement Savings Plan (the "401(k) Plan") that covers all eligible
employees of the Company who complete six months of service and attain age 21.
An eligible employee may elect to defer, in the form of elective deferral
contributions to the 401(k) Plan made on his or her behalf, up to 18% of his
or her eligible compensation provided such amount does not exceed the maximum
amount allowed by the Internal Revenue Service. Elective deferral
contributions are invested in accordance with the directions of the
participants. The elective deferral contributions are fully vested and
nonforfeitable at all times. The 401(k) Plan provides that the Company will
make matching
41
<PAGE>
contributions on behalf of each employee equal to 25% of such employee's
elective deferral contribution. The amount contributed by the Company may not
exceed 1.25% of such employee's eligible annual compensation. Matching
contributions are fully vested and nonforfeitable at all times.
1996 Employee Profit Sharing Plan. In 1996, the Company adopted the 1996
Employee Profit Sharing Plan. This Plan applies to every employee in grades 1
through 9 hired on or before the first working day of a fiscal quarter and who
remains an employee through the last working day of that quarter. Each quarter
is treated separately. Each full-time participant is entitled to a profit-
sharing bonus equivalent to 10 hours of pay if the Company achieves its profit
plan for the quarter. The employee's profit-sharing bonus is adjusted up or
down depending on whether the Company's profits are above or below plan for
that quarter.
1996 Management/Professional Profit Sharing Plan. In 1996, the Company
adopted the 1996 Management/ Professional Profit Sharing Plan. This Plan
applies to every employee grade 10 or above hired on or before September 30,
1996 and who remains an employee through December 31, 1996. Each participant
is entitled to a profit-sharing bonus which is dependent on both the Company's
overall profits as well as profits within the participant's division.
Participants in finance and administration receive a bonus based only on the
Company's overall profits. The participant's bonus is calculated as a
percentage of salary. If both divisions and the Company meet established goals
for 1996, the bonus will be ten percent of the participant's annual
compensation and may be increased if the Company exceeds its profit plan.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Amended and Restated Articles of
Incorporation that eliminate to the fullest extent permissible under
California law the liability of its directors to the Company for monetary
damages. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission nor does it affect
the right of a party to sue (or to recover monetary damages) under federal
securities laws for violations thereof. The Company's Bylaws provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by California law, including in circumstances in which
indemnification is otherwise discretionary under California law. The Company
has entered into indemnification agreements with its officers and directors
containing provisions which may require the Company, among other things, to
indemnify the officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
There is no currently pending litigation or proceeding involving a director,
officer, employee or other agent of the Company in which indemnification would
be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
42
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Canon Inc. ("Canon"), a Japanese company owning greater than ten percent of
the Company's Common Stock outstanding immediately prior to this Offering, is
the Company's exclusive distributor in Japan. In addition, Canon is a supplier
of certain components used in the Company's products. Seymour Liebman, Senior
Vice President and General Counsel of Canon USA, Inc., a subsidiary of Canon,
has served on the Company's Board of Directors since 1993 and is expected to
continue to serve on the Board of Directors after the closing of this
Offering. During the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1996, Canon purchased more than $550,000, $848,000,
$1,029,000 and $488,000, respectively, of the Company's products for resale in
Japan, under an arm's length distribution agreement similar to those in effect
with other international distributors. During the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1996, the Company
purchased approximately $162,000, $148,000, $112,000 and $10,000,
respectively, of Canon's products. Canon is also a Selling Shareholder in the
Offering and will be selling all of its shares, which sale is not expected to
affect the Company's distributor relationship.
In March 1996, the Company acquired substantially all of the assets of SSL.
John F. Tillisch was the Managing Director and sole shareholder of SSL. In
connection with the transaction, the Company and Mr. Tillisch entered into a
noncompetition agreement pursuant to which Mr. Tillisch agreed that for a
period of six years after the closing date of the transaction, he would not
directly or indirectly compete with the business of the Company or its
subsidiaries. In consideration for this agreement, the Company agreed to pay
Mr. Tillisch six annual payments of (Pounds)32,300 for an aggregate amount of
(Pounds)193,800. However, should Mr. Tillisch terminate his employment with
the Company before such six year period expires, the annual remaining payments
will be reduced to (Pounds)16,150. Also in connection with this transaction,
Mr. Tillisch entered into an employment contract with SSL, and was appointed
Vice President, European Operations of the Company. See "Management--
Employment Agreement."
During 1995, the Company repurchased shares of Common Stock at a repurchase
price of $2.40 per share from a number of the Company's shareholders,
including the following holder of more than five percent of the Company's
voting securities.
<TABLE>
<CAPTION>
NUMBER
OF
NAME SHARES
---- -------
<S> <C>
James C. Bliss and Carolyn Joan Bliss,
Trustees of the James C. Bliss and Carolyn Joan Bliss Trust
u/t/d dated October 11, 1979................................... 431,606
</TABLE>
In April 1996, the Company issued and sold 25,000 shares of Common Stock at
a purchase price of $6.00 per share to John M. Lillie and Daryl L. Lillie,
Trustees, Lillie Family Trust. John M. Lillie joined the Company as a director
in 1996.
43
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of June 30, 1996 and as adjusted to
reflect the sale by the Company and the Selling Shareholders of the shares of
Common Stock offered hereby (assuming no exercise of the Underwriters over-
allotment option) by: (i) each person (or group of affiliated persons) known by
the Company to be the beneficial owner of 5% or more of the Company's
outstanding shares of Common Stock; (ii) each director; (iii) each of the Named
Executive Officers; (iv) all directors and executive officers as a group; and
(v) the Selling Shareholders. Except as otherwise noted, the shareholders named
in the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to applicable
community property laws.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP
COMMON STOCK BEFORE THE OF COMMON STOCK AFTER
OFFERING THE OFFERING
----------------------- ---------------------
PERCENTAGE OF NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF OUTSTANDING SHARES BEING OUTSTANDING
BENEFICIAL OWNER NUMBER SHARES OFFERED (1) NUMBER SHARES
------------------- --------- ------------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Larry Israel(2)......... 676,617 22.05% -- 676,617 12.66%
Telesensory Corporation
455 North Bernardo
Avenue
Mountain View, CA 94039
Seymour Liebman(3)...... 425,712 14.13% 416,662 9,050 *
Canon USA, Inc.
One Canon Plaza
Lake Success, NY 11042
Canon Inc............... 416,662 13.87% 416,662 -- --
30-2 Shimomaruko 3-
chome,
Ohta-ku, Tokyo 146
Japan
John G. Linvill(4)...... 161,560 5.36% 75,000 86,560 1.64%
30 Holden Court
Portola Valley, CA
94028
Yakov Soloveychik(5).... 56,733 1.88% -- 56,733 1.07%
Peter D. Stent(6)....... 36,091 1.20% -- 36,091 *
John M. Lillie(7)....... 25,000 * -- 25,000 *
Marc J. Stenzel(8)...... 21,900 * -- 21,900 *
Ronald C. Odell(9)...... 12,900 * -- 12,900 *
Timothy S. Couture(10).. 17,625 * -- 17,625 *
Mitchell Gooze.......... 6,250 * -- 6,250 *
John F. Harper.......... -- -- -- -- --
All current directors
and executive officers
as a group (13 persons)
(11)................... 1,857,050 61.01% 491,662 982,988 18.45%
Other Selling
Shareholders
Paul A. Araquistain and
Melba J. Araquistrain,
Trustees of the Paul
A. Araquistain and
Melba J. Araquistrain
Trusts U/D/T dated
July 17, 1980......... 12,500 * 2,500 10,000 *
John G. Beard.......... 11,625 * 2,325 9,300 *
John G. Beard and Mary
E. Beard,
JJ TEN WROS........... 6,250 * 1,250 5,000 *
Christopher B. Berg.... 16,665 * 3,332 13,333 *
Candace L. Berg........ 16,665 * 3,332 13,333 *
Arthur Carmichael...... 35,875 1.24% 7,175 28,700 *
Arthur Ciocca.......... 125,000 4.32% 25,000 100,000 1.89%
Guy C. Clum............ 11,900 * 1,250 10,650 *
Diane W. Dalton........ 32,070 1.11% 5,000 27,070 *
James F. Dalton........ 48,080 1.66% 4,375 43,705 *
Diane D. Ellis......... 15,625 * 3,125 12,500 *
Michael Felber......... 12,500 * 2,500 10,000 *
Dr. Lee O. Ferguson.... 9,337 * 1,867 7,470 *
Ilana B. Israel........ 22,221 * 4,375 17,846 *
Richard L. Israel...... 22,221 * 2,221 20,000 *
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP
COMMON STOCK BEFORE THE OF COMMON STOCK AFTER
OFFERING THE OFFERING
----------------------- ---------------------
PERCENTAGE OF NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF OUTSTANDING SHARES BEING OUTSTANDING
BENEFICIAL OWNER NUMBER SHARES OFFERED (1) NUMBER SHARES
------------------- --------- ------------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Richard P. Karnan...... 8,975 * 1,795 7,180 *
Irwin G. Kasle, Trustee
of the
Kasle Tax Deferral
Trust................. 14,587 * 2,875 11,712 *
Robert E. King and Dor-
othy J. King,
JT. TEN WROS.......... 10,425 * 425 10,000 *
Paul J. Lewis and San-
dra Lewis
1992 Revocable Trust
dated July 21, 1992... 27,916 * 5,000 22,916 *
Angela C. Linvill...... 16,665 * 3,332 13,333 *
Gregory T. Linvill as
Custodian for
Alyssa K. Linvill,
under the California
Uniform Transfers to
Minors Act............ 16,665 * 3,332 13,333 *
Christianna O.
Linvill............... 16,665 * 3,332 13,333 *
Gregory T. Linvill..... 16,665 * 3,332 13,333 *
John G. Montgomery..... 22,500 * 4,500 18,000 *
Moore Family Trust..... 14,587 * 2,917 11,670 *
Nelson Investment Com-
pany.................. 20,000 * 4,000 16,000 *
Quad J. Ltd. .......... 71,367 2.47% 7,500 63,867 1.21%
Chester L. and Jean F.
Sandberg, JT.......... 6,250 * 1,250 5,000 *
Lawrence J. Stupski
Revocable Trust....... 16,666 * 3,332 13,334 *
Carolyn A. Weihl....... 12,500 * 2,500 10,000 *
Certain other Selling
Shareholders as a group
(12)................... -- -- 14,289 -- --
All Selling Shareholders
as a group (32 per-
sons).................. 1,269,189 43.58% 625,000 644,184 12.30%
</TABLE>
- --------
* Less than one percent.
(1) Applicable percentage of ownership is based on 2,891,822 shares of Common
Stock outstanding as of June 30, 1996 together with applicable options
for such shareholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission, and includes
voting and investment power with respect to shares. Shares of Common
Stock subject to options or warrants currently exercisable or exercisable
within 60 days after June 30, 1996 are deemed outstanding for computing
the percentage ownership of the person holding such options or warrants,
but are not deemed outstanding for computing the percentage of any other
person.
(2) Consists of 528,851 shares of Common Stock held by Larry Israel, Trustee,
Larry Israel Family Trust u/t/d 5/6/83, over which Mr. Israel holds
voting and dispositive power, and 83,333 shares of Common Stock held by
Pensco Pension Services, Inc., Custodian FBO Larry Israel, of which Mr.
Israel is the beneficial owner. Also includes 64,433 shares of Common
Stock issuable pursuant to stock options exercisable within 60 days after
June 30, 1996.
(3) Consists of 9,050 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days after June 30, 1996 and 416,662 shares
held by Canon, Inc. Mr. Liebman is Executive Vice President and General
Counsel of Canon USA, Inc. and disclaims beneficial ownership of the
shares held by Canon Inc.
(4) Consists of 152,510 shares of Common Stock held by John Grimes Linvill
and Marjorie Webber Linvill, Trustees of the John Grimes Linvill and
Marjorie Webber Linvill Trusts dated 9/27/87, over which Mr. Linvill
holds voting and dispositive power, and 9,050 shares of Common Stock
issuable pursuant to stock options exercisable within 60 days after June
30, 1996.
(5) Consists of 20,745 of Common Stock held by The Soloveychik Family
Revocable Trust dated March 15, 1988, over which Mr. Soloveychik holds
voting and dispositive power, and 16,525 shares of Common Stock held by
Pensco Pension Services, Inc. Custodian FBO Yakov Soloveychik, IRA, of
which Mr. Soloveychik is the beneficial owner. Also includes 19,463
shares of Common Stock issuable pursuant to stock options exercisable
within 60 days after June 30, 1996.
(6) Includes 9,050 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after June 30, 1996.
(7) Consists of 25,000 shares of Common Stock held by John M. Lillie and
Daryl L. Lillie, Trustees, Lillie Family Trust, over which Mr. Lillie
holds voting and dispositive power.
(8) Includes 15,650 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after June 30, 1996.
(9) Includes 12,525 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after June 30, 1996.
(10) Includes 12,625 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after June 30, 1996.
(11) Includes 169,470 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days after June 30, 1996. See footnotes (2)
through (10).
(12) Represents the maximum number of shares that may be sold by Selling
Shareholders other than the 32 Selling Shareholders set forth in this
table.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Amended and Restated Articles of Incorporation provide that
the authorized capital stock of the Company is 40,000,000 shares of Common
Stock, $0.02 par value, and 5,000,000 shares of undesignated Preferred Stock,
$0.02 par value. As of June 30, 1996, 2,891,822 shares of Common Stock, held
by approximately 225 holders of record, were outstanding and no shares of
Preferred Stock were outstanding.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered by the Company hereby will be upon payment
therefor, validly issued, fully paid and nonassessable. The holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
Board of Directors may from time to time determine. The shares of Common Stock
are neither redeemable nor convertible and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the rights of any holders of Preferred Stock then
outstanding. Each outstanding share of Common Stock is entitled to one vote on
all matters submitted to a vote of shareholders, and each shareholder has
cumulative voting rights with respect to the election of directors.
WARRANTS
As of June 30, 1996, there were outstanding warrants to purchase an
aggregate of 187,500 shares of Common Stock at an exercise price of $4.80 per
share, all of which will be net exercised prior to the Offering and will
result in the issuance of 112,500 shares assuming an initial public offering
price of $12.00 per share.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
Preferred Stock in one or more series and to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting a series or the designation of such series, without any further
vote or action by the Company's shareholders. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
shareholders and may adversely affect the market price of, and the voting and
other rights of, the holders of Common Stock. The Company has no current plans
to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
John Tillisch is entitled to certain rights with respect to the registration
of his shares ("Registrable Securities") pursuant to the asset purchase
agreement between Mr. Tillisch, the Company and SSL relating to the Company's
acquisition of SSL. If the Company determines to register any of its
securities for the account of its Chief Executive Officer, except for a
registration relating to employee benefit plans, a Commission Rule 145
transaction or an initial public offering, the holders of Registrable
Securities are entitled to include their shares of Common Stock therein.
46
<PAGE>
TRANSFER AGENT
The transfer agent for the Common Stock is Norwest Bank Minnesota, N.A. Its
telephone number is (800) 468-9716.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares or the availability of such shares for sale will have
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock
and the ability of the Company to raise capital through a sale of its
securities.
Upon completion of this Offering, the Company will have approximately
5,279,322 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option.) Of these shares, the 2,900,000 shares
sold in this Offering will be freely transferable without restriction or
registration under the Securities Act, except for any shares purchased by an
existing "affiliate" of the Company, as that term is defined by the Securities
Act (an "Affiliate"), which shares will be subject to the resale limitations
of Rule 144 promulgated under the Securities Act. The remaining 2,379,322
shares outstanding on the date of this Prospectus will be "restricted
securities" as defined in Rule 144. All officers, directors and certain other
shareholders of the Company have agreed not to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, for a period
of 180 days after the date of this Prospectus, without the prior written
consent of Jefferies & Company, Inc. As a result of these contractual
restrictions and the provisions of Rules 144(k), 144 and 701, the restricted
shares will be available for sale in the public market as follows: (i) 232,786
shares will be eligible for immediate sale on the date of this Prospectus,
(assuming no exercise of outstanding options after June 30, 1996), (ii) an
additional 96,067 shares, of which 90,930 shares are issuable upon exercise of
currently outstanding vested options, will be eligible for sale 90 days after
the date this Prospectus, (iii) an additional 1,994,321 shares, of which 2,950
shares are issuable upon exercise of currently outstanding vested options,
will be eligible for sale 180 days after the date of this Prospectus upon
expiration of lock-up agreements, and (iv) an additional 150,000 shares will
be eligible for sale at various times thereafter.
In general, under Rule 144 under the Securities Act as currently in effect,
a person (or persons whose shares are aggregated) who has beneficially owned
restricted securities within the meaning of Rule 144 (the "Restricted
Securities") for at least two years, and including the holding period of any
prior owner except an Affiliate, would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of one
percent of the then outstanding shares of Common Stock or the average weekly
trading volume of the Common Stock on the Nasdaq National Market during the
four calendar weeks preceding such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an Affiliate of the
Company at any time during the three months preceding a sale, and who has
beneficially owned shares for at least three years (including any period of
ownership of preceding non-affiliated holders), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, employees, directors, officers, consultants
or advisors may rely on Rule 701 with respect to the resale of securities
originally purchased from the Company prior to the date the issuer becomes
subject to the reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the Securities and Exchange Commission has indicated that Rule 701
will apply to typical stock options granted by an issuer before it becomes
subject to the reporting requirements of the Exchange Act, along with the
Securities
47
<PAGE>
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this Prospectus, may be sold by persons other than Affiliates subject only to
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its two-year minimum holding period requirements.
At June 30, 1996, options to purchase 623,494 shares of Common Stock were
outstanding. Shortly after this offering, the Company intends to file a
registration statement on Form S-8 under the Securities Act covering shares of
Common Stock reserved for issuance under the Company's stock plans. See
"Management--Stock and Employee Benefit Plans." As a result of that
registration statement, approximately 215,249 shares issuable upon the
exercise of vested stock options will be eligible for sale in the public
market, subject to Rule 144 volume limitations applicable to Affiliates, upon
the date the Form S-8 is filed with the Securities and Exchange Commission,
assuming all of such options are exercised.
The Company intends to file registration statements under the Securities Act
registering the shares of Common Stock reserved for issuance under the 1985
Incentive Stock Option Plan, the 1993 Stock Plan, the 1995 Stock Plan and the
Employee Stock Purchase Plan. See "Management--Stock and Employee Benefit
Plans." Accordingly, shares registered under such registration statements will
be available for sale in the open market, unless such shares are subject to
vesting restrictions with the Company.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement,
the Company and the Selling Shareholders have agreed to sell an aggregate of
2,275,000 and 625,000 shares, respectively, of Common Stock to the
underwriters named below (the "Underwriters"), for whom Jefferies & Company,
Inc. and Van Kasper & Company are acting as representatives (the
"Representatives"), and the Underwriters have severally agreed to purchase
from the Company and the Selling Shareholders the number of shares of Common
Stock set forth opposite their respective names in the table below at the
price set forth on the cover page of the Prospectus.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Jefferies & Company, Inc...................................
Van Kasper & Company.......................................
---------
Total.................................................. 2,900,000
=========
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
is subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below), if any such shares are
purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a discount not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the Common Stock, the public
offering price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period from the date of this Prospectus, to purchase up
to an additional 435,000 shares of Common Stock at the public offering price
set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise such option solely for the purpose of
covering over allotments, if any, in connection with the Offering. To the
extent such option is exercised, each Underwriter will be obligated, subject
to certain conditions, to purchase additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the
preceding table.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this Offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection
with the Offering, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in
respect thereof.
The Company, executive officers, directors and certain other shareholders of
the Company have agreed that they will not, without the prior written consent
of Jefferies & Company, Inc., offer, sell or otherwise dispose of any shares
of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned
by them for a period of 180 days after the date of this Prospectus.
49
<PAGE>
The Company has been advised by the Representatives that the Representatives
presently intend to make a market in the Common Stock offered hereby; however,
the Representatives are not obligated to do so, and any market making activity
may be discontinued at any time without notice. There can be no assurance that
an active public market for the Common Stock will develop and continue after
this Offering. See "Risk Factors -- No Prior Trading Market for Common Stock;
Potential Volatility of Stock Price."
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined
by negotiations among the Company, the Selling Shareholders and the
Representatives. The factors considered in making such determination were the
prevailing market conditions and general economic conditions, the market
prices of securities and certain financial and operating information of
publicly traded companies which the Company, the Selling Shareholders and the
Representatives believe to be comparable to the Company, the earnings and
certain other financial and operating information of the Company in recent
periods, and the history and future prospects of the Company and its industry
in general. See "Risk Factors -- No Prior Trading Market for Common Stock;
Potential Volatility of Stock Price."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto,
California. Certain legal matters in connection with this Offering will be
passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. As of the date of this Prospectus, certain members and
investment partnerships of Wilson Sonsini Goodrich & Rosati, P.C.,
beneficially own 29,668 shares of the Common Stock.
EXPERTS
The consolidated financial statements of Telesensory Corporation and
Subsidiaries as of December 31, 1994 and 1995 and for each of the three years
in the period ended December 31, 1995 included in this prospectus and the
related financial statement schedule included elsewhere in the Registration
Statement, have been audited by Deloitte & Touche LLP, independent auditors as
stated in their reports appearing herein and elsewhere in the Registration
Statement and have been included in reliance on the reports of such firm, upon
their authority as experts in accounting and auditing.
The consolidated financial statements of Sensory Systems, Limited and
Subsidiary as of December 31, 1994 and 1995 and for each of the two years in
the period ended December 31, 1995 included in this prospectus have been
audited by Keith Jones FCA, Chartered Accountant, independent auditors as
stated in their report appearing herein and have been included in reliance on
the report of such firm, upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act and the rules and regulations promulgated thereunder, covering
the Common Stock offered hereby. This Prospectus omits certain information
contained in the Registration Statement and the exhibits and schedules
thereto, and reference is made to the Registration Statement and the exhibits
and schedules thereto for further information with respect to the Company and
the Common Stock offered hereby. Statements contained in this Prospectus as to
the contents of any contract, agreement or other document are necessarily
summaries of such contracts or documents. Although all material elements of
such contracts or documents required to be disclosed in this Prospectus are so
disclosed, each such statement is qualified in its entirety by reference to
the copy of such contract or document filed as an exhibit to the Registration
Statement. The Registration Statement may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis, and Retrieval system. This
Web site can be accessed at http://www.sec.gov.
50
<PAGE>
TELESENSORY CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TELESENSORY CORPORATION AND SUBSIDIARIES
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30,
1996.................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1993, 1994 and 1995 and Six Months Ended June 30, 1995 and 1996......... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995 and Six Months Ended June 30, 1996..... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995 and Six Months Ended June 30, 1995 and 1996......... F-6
Notes to Consolidated Financial Statements for the Years Ended December
31, 1993, 1994 and 1995 and Six Months Ended June 30, 1995 and 1996..... F-7
TELESENSORY CORPORATION AND SUBSIDIARIES AND SENSORY SYSTEMS LIMITED AND
SUBSIDIARY
Pro Forma Condensed Combining Financial Information...................... F-16
Pro Forma Condensed Combining Statement of Operations for the Year Ended
December 31, 1995....................................................... F-17
Pro Forma Condensed Combining Statement of Operations for the Six Months
Ended June 30, 1996..................................................... F-18
Notes to Pro Forma Condensed Combining Financial Information............. F-19
SENSORY SYSTEMS LIMITED AND SUBSIDIARY
Independent Auditors' Report............................................. F-20
Consolidated Balance Sheet at December 31, 1995.......................... F-21
Balance Sheet at December 31, 1995....................................... F-22
Consolidated Profit and Loss Account for the Year Ended December 31,
1995.................................................................... F-23
Consolidated Statement of Cash Flows for the Year Ended December 31,
1995.................................................................... F-24
Notes to the Financial Statements for the Year Ended December 31, 1995... F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Telesensory Corporation:
We have audited the accompanying consolidated balance sheets of Telesensory
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Telesensory Corporation and
subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
February 23, 1996
(August 14, 1996
as to the second and third
sentences of Note 1 to the
Consolidated Financial Statements)
F-2
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................. $ 423 $ 169 $ 317
Accounts receivable, net of allowance: 1994--$50;
1995--$102; 1996--$130........................... 4,728 5,527 6,537
Inventories...................................... 3,909 3,488 3,479
Prepaid expenses and other....................... 262 236 226
Deferred income taxes............................ 604 433 895
------- ------- -------
Total current assets........................... 9,926 9,853 11,454
Equipment and improvements, net.................... 995 1,191 1,470
Other assets....................................... -- -- 1,789
------- ------- -------
Total.............................................. $10,921 $11,044 $14,713
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................ $ 1,787 $ 1,100 $ 1,700
Current portion of long-term debt................ -- 770 537
Accounts payable................................. 1,633 1,107 1,769
Accrued expenses................................. 2,379 2,997 3,040
Deposits and deferred revenue.................... 442 517 441
------- ------- -------
Total current liabilities...................... 6,241 6,491 7,487
Deferred income taxes.............................. 676 613 571
Long-term debt..................................... -- 26 708
Shareholders' equity:
Preferred stock, $.02 par value, 5,000,000 shares
authorized; none outstanding.................... -- -- --
Common stock, $.02 par value; 10,000,000 shares
authorized; shares outstanding: 1994--3,356,878;
1995--2,734,572; 1996--2,891,822................ 67 55 58
Additional paid-in capital....................... 2,932 2,448 3,314
Accumulated translation adjustment............... -- -- 13
Retained earnings................................ 1,005 1,411 2,562
------- ------- -------
Total shareholders' equity..................... 4,004 3,914 5,947
------- ------- -------
Total.............................................. $10,921 $11,044 $14,713
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- ----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue.................... $ 27,083 $ 27,588 $ 30,671 $15,317 $17,240
Cost of revenue................ 14,697 15,332 16,670 8,455 9,795
-------- -------- -------- ------- -------
Gross profit................... 12,386 12,256 14,001 6,862 7,445
-------- -------- -------- ------- -------
Operating expenses:
Product development.......... 2,876 2,617 2,286 1,170 1,129
Sales, general and
administrative.............. 10,303 9,020 9,374 4,634 4,885
Restructuring................ 507 332 -- -- --
-------- -------- -------- ------- -------
Total operating expenses... 13,686 11,969 11,660 5,804 6,014
-------- -------- -------- ------- -------
Operating income (loss)........ (1,300) 287 2,341 1,058 1,431
-------- -------- -------- ------- -------
Other income (expense):
Interest expense............. (117) (161) (123) (66) (111)
Interest income.............. 19 17 36 11 54
Foreign currency exchange
gain (loss)................. 90 (34) 4 2 (10)
-------- -------- -------- ------- -------
Total other expense........ (8) (178) (83) (53) (67)
-------- -------- -------- ------- -------
Income (loss) before income
taxes......................... (1,308) 109 2,258 1,005 1,364
Income taxes................... 21 268 867 386 213
-------- -------- -------- ------- -------
Net income (loss).............. $ (1,329) $ (159) $ 1,391 $ 619 $ 1,151
======== ======== ======== ======= =======
Net income (loss) per share.... $ (0.36) $ (0.04) $ 0.41 $ 0.17 $ 0.35
Shares used in per share
calculation................... 3,715 3,738 3,376 3,567 3,300
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND SIX MONTHS ENDED JUNE 30,
1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL ACCUMULATED SHARE-
----------------- PAID-IN TRANSLATION RETAINED HOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS EQUITY
--------- ------ ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1993................... 3,257,502 $ 65 $2,797 $ 661 $ 2,493 $ 6,016
Exercise of employee
stock options.......... 96,863 2 129 -- -- 131
Translation adjustment.. -- -- -- (717) -- (717)
Net loss................ -- -- -- -- (1,329) (1,329)
--------- ---- ------ ----- ------- -------
Balances, December 31,
1993................... 3,354,365 67 2,926 (56) 1,164 4,101
Exercise of employee
stock options.......... 2,513 -- 6 -- -- 6
Amounts related to
closure of
subsidiaries........... -- -- -- 280 -- 280
Translation adjustment.. -- (224) (224)
Net loss................ -- -- -- -- (159) (159)
--------- ---- ------ ----- ------- -------
Balances, December 31,
1994................... 3,356,878 67 2,932 -- 1,005 4,004
Exercise of employee
stock options.......... 20,875 1 50 -- -- 51
Issuance of common stock
for services rendered.. 25,000 1 59 -- -- 60
Repurchase of common
stock.................. (668,181) (14) (593) -- (985) (1,592)
Net income.............. -- -- -- -- 1,391 1,391
--------- ---- ------ ----- ------- -------
Balances, December 31,
1995................... 2,734,572 55 2,448 -- 1,411 3,914
Exercise of employee
stock options
(unaudited)............ 7,250 -- 19 -- -- 19
Issuance of common stock
for acquisition
(unaudited)............ 125,000 3 697 -- -- 700
Issuance of common stock
(unaudited)............ 25,000 -- 150 -- -- 150
Translation adjustment
(unaudited)............ -- -- -- 13 -- 13
Net income (unaudited).. -- -- -- -- 1,151 1,151
--------- ---- ------ ----- ------- -------
Balances, June 30, 1996
(unaudited)............ 2,891,822 $ 58 $3,314 $ 13 $ 2,562 $ 5,947
========= ==== ====== ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- ----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $ (1,329) $ (159) $ 1,391 $ 619 $ 1,151
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization................ 1,272 372 360 174 281
Non-cash compensation
expense..................... -- -- 60 -- --
Loss from disposal of
equipment and improvements.. 11 26 10 -- --
Amounts related to closure of
subsidiaries................ -- 280 -- -- --
Deferred income taxes........ -- 109 108 -- (504)
Changes in assets and
liabilities that provided
(used) cash:
Accounts receivable......... 147 (1,105) (799) (472) (796)
Inventories................. 653 457 421 239 629
Prepaid expenses and other.. 95 86 26 (84) 74
Accounts payable............ (92) 196 (526) (174) 611
Accrued expenses............ (663) 278 618 763 (245)
Deposits and deferred
revenue.................... (18) (46) 75 124 (188)
-------- -------- -------- ------- -------
Net cash provided by
operating activities...... 76 494 1,744 1,189 1,013
-------- -------- -------- ------- -------
Cash flows used in investing
activities:
Acquisition of equipment and
improvements................. (318) (607) (566) (156) (344)
Payment for purchase of SSL,
net of cash acquired......... -- -- -- -- (1,752)
-------- -------- -------- ------- -------
Net cash used in investing
activities................ (318) (607) (566) (156) (2,096)
-------- -------- -------- ------- -------
Cash flows from financing
activities:
Short-term borrowings, net.... 700 (213) (687) (1,387) 600
Long-term debt borrowings..... -- -- 1,000 1,000 1,000
Repayments of long-term debt.. (87) (231) (204) (51) (551)
Proceeds from issuance of
common stock................. 131 6 51 88 169
Repurchase of common stock.... -- -- (1,592) (1,035) --
-------- -------- -------- ------- -------
Net cash (used in) provided
by financing activities... 744 (438) (1,432) (1,385) 1,218
-------- -------- -------- ------- -------
Effect of exchange rate changes
on cash....................... (717) (224) -- -- 13
-------- -------- -------- ------- -------
Net (decrease) increase in cash
and equivalents............... (215) (775) (254) (352) 148
Cash and equivalents, beginning
of period..................... 1,413 1,198 423 423 169
-------- -------- -------- ------- -------
Cash and equivalents, end of
period........................ $ 1,198 $ 423 $ 169 $ 71 $ 317
======== ======== ======== ======= =======
Cash paid during the period
for:
Interest...................... $ 237 $ 195 $ 124 $ 68 $ 111
======== ======== ======== ======= =======
Income taxes.................. $ 8 $ 3 $ 929 $ 267 $ 729
======== ======== ======== ======= =======
Supplemental disclosures of
financing activities--
Common stock issued for
services rendered........... $ -- $ -- $ 60 $ 60 $ --
======== ======== ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization--Telesensory Corporation and subsidiaries (the Company) are in
the business of developing, manufacturing and marketing a broad array of
products for visually impaired people. In July 1996, the Company's Board of
Directors approved a five-for-four forward split of the common stock to be
effected on August 14, 1996. All common stock data in the accompanying
financial statements have been retroactively adjusted to reflect the split.
Principles of Consolidation--The consolidated financial statements include
the accounts of Telesensory Corporation and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
During 1993, the Company closed certain of its European subsidiaries. During
1994, the Company closed its remaining wholly-owned foreign subsidiaries and
transferred the related operations to its U.S. manufacturing facility. The
Company recognized restructuring expenses of $507,000 and $332,000 during 1993
and 1994, respectively. As of December 31, 1994, $102,000 of restructuring
expenses had not been paid and is included in accrued expenses. There were no
accrued restructuring expenses at December 31, 1993 and 1995. The Company has
implemented a plan to complete liquidation of those subsidiaries during 1996.
During 1996, the Company acquired two European distributors. See Note 3.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, net
revenue and expenses as of the dates and for the periods presented.
Significant estimates include the allowance for doubtful accounts receivable,
the net realizable value of inventory, estimated useful life of goodwill,
warranty reserves and the valuation allowance on net deferred tax assets.
Actual results could differ from those estimates.
Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of cash and
equivalents and accounts receivable. Risks associated with cash and
equivalents are mitigated by banking with creditworthy institutions. The
Company sells its products to distributors and end users. To reduce credit
risk, management performs periodic credit evaluations of its customers'
financial condition and requires deposits from new customers. The Company
maintains reserves for potential credit losses, but historically has not
experienced any significant losses related to end users or distributors.
International sales accounted for approximately 33.0%, 31.8% and 35.1% of net
revenue for 1993, 1994 and 1995, respectively and 40.3% of net revenue for the
six months ended June 30, 1996.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market.
Equipment and Improvements--Equipment and improvements are stated at cost.
Depreciation is provided principally on the straight-line method over the
estimated useful lives of the respective assets ranging from three to five
years. Leasehold improvements are amortized over the shorter of the asset life
or lease term.
Other Assets--Other assets include goodwill which was generated in
acquisitions and is amortized using the straight-line method over an estimated
useful life of fifteen years. The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of" effective January 1,
1995. The adoption of this statement had no effect on the Company's financial
condition or results of operations. The Company evaluates the recoverability
of goodwill on a quarterly basis based on estimated undiscounted future cash
flows.
Revenue Recognition--Revenue from product sales is recognized upon shipment.
Estimated costs for returns and warranty are accrued at the time of shipment.
F-7
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Revenue--Service revenue is deferred and recognized ratably over
the term of the service contract, generally one to four years, on a straight-
line basis. Costs for work performed under the service contracts are charged
to operations as incurred.
Income Taxes--The Company uses an asset and liability approach to account
for income taxes which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the financial statement carrying amount and the tax bases of assets
and liabilities and net operating loss and tax credit carryforwards.
Foreign Currency Translation--The functional currency of the Company's
United Kingdom subsidiary is the British pound. The functional currency of the
Company's former subsidiary in Ireland, which the Company decided to close in
1994, was the Irish pound. Accordingly, the assets and liabilities of the
subsidiaries have been translated at exchange rates at the balance sheet date
and the related revenues and expenses at the average exchange rates in effect
during the year. The resulting accumulated translation adjustments are
recorded as a separate component of shareholders' equity. Gains and losses
resulting from foreign currency transactions (transactions denominated in
currencies other than the functional currency) are included in the income
(loss) for the period. The Company monitors its foreign currency exchange
risks and has not entered into future contracts to manage foreign currency
exchange risk or the interest rate risk inherent in variable rate foreign
debt.
Effective January 1, 1995 the Company changed the functional currency of the
Irish subsidiary to the U.S. dollar. The accumulated translation adjustment of
$280,000 at December 31, 1994 was recognized as a reduction of the
restructuring expense in 1994.
Net Income (Loss) Per Share--Net income (loss) per share is computed using
the weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares include stock options and warrants
(using the treasury stock method). Common equivalent shares are excluded for
the computation if their effect is anti-dilutive except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins and staff
policy, such computations include all common and common equivalent shares
issued within the 12 months preceding the filing date as if they were
outstanding for all periods presented (using an assumed initial public
offering price of $12 per share).
Fair Value of Financial Instruments--SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," requires the Company to disclose the fair
value of financial instruments for which it is practicable to estimate fair
value. Financial instruments included in the Company's balance sheet at
December 31, 1995 consist of cash and equivalents, borrowings under the line
of credit and long-term debt. For cash and equivalents, the carrying amount is
a reasonable estimate of the fair value. The carrying amount of the line of
credit and long-term debt is also considered a reasonable estimate of fair
value as the borrowings are at adjustable interest rates and reprice based on
fluctuations in market conditions.
2. UNAUDITED INTERIM INFORMATION
The financial information as of June 30, 1996 and with respect to the six
months ended June 30, 1995 and 1996 is unaudited. The information disclosed in
the notes to the consolidated financial statements for these periods is
unaudited. In the opinion of management, such information contains all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of such periods. The results of operations
for the six months ended June 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
F-8
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITION (UNAUDITED)
On March 29, 1996, the Company acquired substantially all assets and assumed
certain liabilities of Sensory Systems Limited (SSL), a United Kingdom
corporation, and 100% of the stock of Teletec SARL (Teletec), a French
corporation and SSL's wholly-owned subsidiary. SSL and Teletec were in the
business of distributing and selling products of the Company and other
manufacturers for visually impaired people in Europe. As consideration for the
purchase, the Company paid $1,631,000 in cash and issued 125,000 shares of its
common stock to the former shareholder of SSL. The Company has recorded the
value of the common stock issued at an aggregate amount of $700,000. The
Company incurred a total of $132,000 of expenses in connection with the
acquisition, resulting in a total recorded purchase price of $2,463,000. The
business combination has been accounted for by the purchase method.
Fair value of assets acquired and liabilities assumed (in thousands):
<TABLE>
<S> <C>
Cash................................................................ $ 11
Excess of purchase price over net assets acquired................... 1,688
Other assets acquired............................................... 1,064
Liabilities assumed................................................. (300)
------
Total purchase price............................................. $2,463
======
</TABLE>
The excess of purchase price over net assets acquired is included in other
assets and is being amortized over its estimated useful life of fifteen years.
Amortization of $42,000 was recorded during the six months ended June 30,
1996.
In addition, the Company entered into a covenant not to compete which is
being amortized over six years, which is the term of the agreement.
The operating results of SSL and Teletec are included in the Company's
consolidated results of operations from the date of acquisition. The following
pro forma summary presents the consolidated results of operations as if the
acquisition had occurred at the beginning of 1994. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisition been made as of
those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
---------------- JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 1995 1996
------------------------------------- ------- ------- ----------
<S> <C> <C> <C>
Net revenue...................................... $31,339 $33,989 $18,054
Net income (loss)................................ $ (264) $ 1,550 $ 1,125
Net income (loss) per share...................... $ (0.07) $ 0.46 $ 0.34
</TABLE>
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Finished goods........................................ $1,604 $1,068 $1,397
Work in process....................................... 387 436 658
Raw materials......................................... 1,918 1,984 1,424
------ ------ ------
Total inventories..................................... $3,909 $3,488 $3,479
====== ====== ======
</TABLE>
F-9
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Machinery and tooling............................... $2,486 $2,871 $2,791
Furniture, fixtures and improvements................ 481 496 1,066
------ ------ ------
2,967 3,367 3,857
Accumulated depreciation and amortization........... (1,972) (2,176) (2,387)
------ ------ ------
Total equipment and improvements, net............... $ 995 $1,191 $1,470
====== ====== ======
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Accrued compensation and related expenses............. $ 858 $1,461 $1,101
Accrued product warranty.............................. 284 422 531
Income taxes.......................................... 584 412 412
Royalties and commissions............................. 180 153 197
Other................................................. 473 549 799
------ ------ ------
Total accrued expenses................................ $2,379 $2,997 $3,040
====== ====== ======
</TABLE>
7. BORROWING ARRANGEMENTS
Short-Term Borrowings--The Company had a revolving line of credit with a bank
which provides for borrowings of up to $3,500,000, limited to outstanding
accounts receivable and inventory, as defined, which expires October 1996. The
line of credit is collateralized by substantially all of the Company's assets.
At December 31, 1995, the Company had $1,100,000 outstanding under this line.
Advances bore interest at the bank's reference rate (8.50% at December 31,
1995) plus 0.75%. The Company had $1,700,000 outstanding under the revolving
line of credit at June 30, 1996, bearing interest at the bank's reference rate
(8.5% at June 30, 1996) plus 1.25%.
Long-Term Debt--The Company had two term notes with the same bank with
outstanding balances of $601,000 and $195,000 at December 31, 1995, which bear
interest at 10% and the bank's reference rate (8.50% at December 31, 1995)
plus 1.5%, respectively, and are due in monthly installments. The Company is
also required to make an additional payment against the outstanding loan
balance in the amount of 50% of net income in excess of $500,000 for 1995.
Accordingly, subsequent to year end, the Company made a payment of $445,000 to
the bank. The long-term portion of $26,000 is due in 1997. The notes are
collateralized by substantially all of the Company's assets.
All of the bank borrowings are subject to certain financial covenants
including maintenance of minimum levels of quick ratio, tangible net worth and
working capital and maintenance of maximum levels of the ratio of debt to
total net worth, as well as quarterly net income, and debt service coverage
requirements. In addition, the Company is prohibited from paying dividends
without the consent of the bank under the terms of the agreements. At December
31, 1995, the Company was in compliance with these covenants.
F-10
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On March 22, 1996 the Company obtained a term loan from the same bank for
$1,000,000 which bears interest at the bank's reference rate (8.5% at June 30,
1996) plus 1.5% and is due in monthly installments of $27,800 plus interest.
The Company is also required to make an additional payment against the
outstanding loan balance in the amount of 50% of net income in excess of
$625,000 for each fiscal year starting in 1996.
The Company's subsidiary in United Kingdom has a line of credit with a bank
that provides for borrowings of up to (Pounds)100,000 bearing interest at the
bank's reference rate (5.75% at June 30, 1996) plus 2%, which has been
guaranteed by the Company. At June 30, 1996, there were no borrowings
outstanding under this line.
8. INCOME TAXES
Income taxes consist of (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- JUNE 30,
1993 1994 1995 1996
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Current:
Federal.............................. $ -- $ 149 $ 614 $ 557
State................................ -- 10 145 135
Foreign.............................. 21 -- -- 25
-------- -------- -------- -------
Total................................ 21 159 759 717
-------- -------- -------- -------
Deferred:
Federal.............................. -- 45 17 (467)
State................................ -- 64 91 (37)
-------- -------- -------- -------
Total................................ -- 109 108 (504)
-------- -------- -------- -------
$ 21 $ 268 $ 867 $ 213
======== ======== ======== =======
</TABLE>
Income tax expense differs from the amount computed by applying the
federal statutory income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
SIX
MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------- JUNE 30,
1994 1995 1996
------------- ------------ --------
<S> <C> <C> <C>
Tax computed at federal statutory
rate................................. 35.0% 35.0% 35.0%
Dividends from foreign subsidiaries... 466.9 -- --
Foreign tax credits................... (217.0) -- (1.0)
State income taxes, net of federal
effect............................... -- 6.3 6.2
Change in valuation allowance......... -- -- (21.5)
Other................................. (39.0) (2.9) (3.1)
------------- ----------- -----
Total................................. 245.9% 38.4% 15.6%
============= =========== =====
</TABLE>
Income tax expense in 1993 relates to foreign withholding taxes on royalty
revenue. Otherwise, the Company was not required to provide for income taxes
due to its operating loss.
F-11
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net deferred tax asset (liability) consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------ JUNE 30,
1994 1995 1996
----- ----- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Accruals and reserves recognized in different
periods....................................... $ 632 $ 656 $810
Tax basis depreciation......................... 94 89 85
Net operating loss carryforward................ 108 -- --
Tax credit carryforward........................ 82 -- --
----- ----- ----
Total........................................ 916 745 895
Deferred tax liability--nontaxed foreign
subsidiary income............................... (676) (613) (571)
Valuation allowance.............................. (312) (312) --
----- ----- ----
Net deferred tax asset (liability)........... $ (72) $(180) $324
===== ===== ====
</TABLE>
The Company recorded a valuation allowance of $312,000 with respect to the
realization of deferred tax assets as of December 31, 1994 and 1995 because,
in management's judgment, the weight of evidence available at the time
indicated that it was more likely than not that such portion of deferred tax
assets would not be realized. The principal evidence considered for 1995
include operating losses in prior years, the relatively short duration of the
Company's profitability, and unfavorable budget variances in the first two
months of 1996. Based on operating results for March 1996 and the outlook for
the remainder of 1996, management revised its assessment and concluded that it
was more likely than not that all deferred tax assets as of March 31, 1996
would be realized. Accordingly, the valuation allowance was eliminated as of
that date.
9. SHAREHOLDERS' EQUITY
PREFERRED STOCK
During 1995, the Board of Directors authorized 5,000,000 shares of preferred
stock. No shares were outstanding as of December 31, 1995. The rights and
terms are determinable at the discretion of the Board of Directors.
STOCK OPTION PLANS
The Company has three stock option plans which provide for the granting of
stock options to officers and employees at prices not less than fair market
value of the Company's common stock as determined by the Board of Directors on
the grant date. Options not fully exercisable at December 31, 1995 are
exercisable in 2.7% and 3% monthly or 20% annual increments from the date of
grant. The options expire between four and ten years from the date of grant.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting for
stock options and other equity instruments, such as stock purchase plans.
Under this method, compensation cost is measured based on the fair value of
the stock award when granted and is recognized as an expense over the service
period, which is usually the vesting period. This standard will be effective
for the Company beginning in 1996 and requires measurement of awards made
beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma effect of
net income and earnings per share as if the company had applied the new method
of accounting. The Company intends to implement these disclosure requirements
for its stock option plans. As a result, for options issued to employees
adoption of the new standard will not impact reported earnings or earnings per
share, and will have no effect on the Company's cash flows.
F-12
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of option activity follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
----------------------------
NUMBER PRICE PER
OF SHARES SHARE
------------ --------------
<S> <C> <C>
Balances, January 1, 1993....................... 505,875 $ .96-$3.96
Granted......................................... 336,250 3.60
Exercised....................................... (100,750) .96- 3.60
Canceled........................................ (120,875) .96- 3.96
-----------
Balances, December 31, 1993..................... 620,500 .96- 3.96
Granted......................................... 79,375 2.40
Exercised....................................... (2,512) .96- 3.60
Canceled........................................ (430,050) .96- 3.60
-----------
Balances, December 31, 1994..................... 267,313 2.40- 2.64
Granted......................................... 405,369 2.40- 2.64
Exercised....................................... (20,875) 2.40- 2.64
Canceled........................................ (103,563) 2.40
-----------
Balances, December 31, 1995..................... 548,244 2.40- 2.64
Granted (unaudited)............................. 98,750 4.80- 6.40
Exercised (unaudited)........................... (7,250) 2.40- 2.64
Canceled (unaudited)............................ (16,250) 2.40
-----------
Balances, June 30, 1996 (unaudited)............. 623,494 $2.40-$6.40
===========
</TABLE>
On October 26, 1994, the Company repriced all outstanding options with
exercise prices of $2.60 to $3.96 to exercise prices of $2.40 to $2.64.
At December 31, 1995, options to purchase 154,715 shares of common stock
were exercisable, options to purchase 163,382 shares were available for future
grants and 711,626 shares were reserved for issuance under the stock option
plans.
In June, 1996, the shareholders approved an amendment to the 1995 Plan to
increase the number of shares reserved for issuance from 250,000 to 500,000.
At June 30, 1996, options to purchase 267,175 shares of common stock were
exercisable, options to purchase 329,006 shares were available for future
grants and 952,500 shares were reserved for issuance under the stock option
plans.
WARRANTS
At December 31, 1995, warrants to purchase 187,500 shares of common stock at
an exercise price of $4.80 per share were outstanding. All warrants issued in
February, 1994, are exercisable and expire on either December 31, 1998, upon a
public offering of the Company's securities, a merger, or upon a sale of
substantially all of the assets of the Company.
F-13
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. LEASES
The Company leases manufacturing and office facilities under operating lease
agreements expiring through 1997. The provisions of certain of these leases
require the Company to pay maintenance, property taxes and insurance. Future
minimum payments under noncancelable operating lease agreements as of December
31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996.................................................................. $ 543
1997.................................................................. 498
------
$1,041
======
</TABLE>
Rent expense for 1993, 1994 and 1995 was $481,000, $513,000 and $518,000,
respectively.
In connection with the acquisition of SSL and Teletec in March 1996 (see
Note 3), the Company assumed certain lease obligations which require future
payments of approximately $67,000 per year through 2002.
11. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan (the Plan) covering substantially all
employees. The Plan provides for voluntary tax deferred contributions of 1% to
18% of gross compensation, subject to certain Internal Revenue Service
limitations. Based on approval by the Board of Directors the Company may make
matching contributions to the Plan. The Company contributed $72,000, $69,000,
and $63,000 for 1993, 1994 and 1995, respectively, and $42,000 for the six
months ended June 30, 1996.
The Company also has two profit-sharing plans which provide distributions to
all eligible employees. The Company's contributions to the plans are
determined in accordance with the terms of the plans and are approved by the
compensation committee of the Board of Directors. The Company contributed
$43,000, $58,000, and $948,000 for 1993, 1994 and 1995, respectively, and
$285,000 (unaudited) for the six months ended June 30, 1996.
12. FOREIGN OPERATIONS
On March 29, 1996, the Company commenced operations in the United Kingdom
and France (see Note 3). During 1994, the Company decided to close its
subsidiary in Ireland. Foreign operations and asset and liability balances,
net of intercompany transactions, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Assets............................................. $240 $ 65 $1,724
Liabilities........................................ $ 40 $ 36 $ 561
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
----------------------------- JUNE 30,
1993 1994 1995 1996
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
Net revenue...................... $ 3,523 $ 2,235 $ -- $1,091
Net income (loss)................ $ (120) $ (1,231) $ (143) $ 2
</TABLE>
F-14
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. RELATED PARTY TRANSACTIONS
The Company entered into certain transactions with a shareholder which owns
more than 10% of the outstanding Common Stock of the Company. Purchases from
the shareholder were $162,000 $148,000 and $112,000 for the years ended
December 31, 1993, 1994 and 1995, respectively and $10,000 for the six months
ended June 30, 1996. Sales to the shareholder were $550,000 $848,000 and
$1,029,000 for the years ended December 31, 1993, 1994 and 1995, respectively,
and $488,000 for the six months ended June 30, 1996.
Amounts due from this shareholder at December 31, 1995 and June 30, 1996
were $264,000 and $204,000, respectively.
*****
F-15
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
AND SENSORY SYSTEMS LIMITED AND SUBSIDIARY
PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION (UNAUDITED)
On March 29, 1996, Telesensory Corporation and subsidiaries (the Company)
acquired certain assets of Sensory Systems Limited (SSL) including the
outstanding capital stock of its wholly-owned subsidiary in France, Teletec
SARL (Teletec). The following unaudited pro forma condensed combining
financial information reflects this business combination which has been
accounted for under the purchase method of accounting.
The unaudited pro forma condensed combining financial information should be
read in conjunction with the accompanying notes to the pro forma condensed
combining financial information and in conjunction with the historical
consolidated financial statements and the related notes thereto of the Company
and the historical financial statements and related notes thereto of SSL
included herein.
The unaudited pro forma condensed combining statement of operations combines
the Company's results of operations for the six months ended June 30, 1996 and
the year ended December 31, 1995 with the operating results of SSL including
its wholly-owned subsidiary Teletec for the comparable periods and have been
prepared as if the merger was completed as of January 1, 1995, the beginning
of the earliest period presented. The unaudited pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results that would have occurred had the merger been consummated
at the beginning of the periods presented, nor is it necessarily indicative of
future operating results.
F-16
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
AND SENSORY SYSTEMS LIMITED AND SUBSIDIARY
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SENSORY
TELESENSORY SYSTEMS
CORPORATION LIMITED
AND AND PRO FORMA PRO FORMA
SUBSIDIARIES SUBSIDIARY ADJUSTMENTS COMBINED
------------ ---------- ----------- ---------
(1) (2)
<S> <C> <C> <C> <C>
Net revenue................. $30,671 $4,963 $(1,645)(b) $33,989
Cost of revenue............. 16,670 2,770 (1,617)(b) 17,823
------- ------ ------- -------
Gross profit................ 14,001 2,193 (28) 16,166
------- ------ ------- -------
Operating expenses:
Product development....... 2,286 -- -- 2,286
Sales, general and
administrative........... 9,374 1,639 162 (c) 11,175
------- ------ ------- -------
Total operating
expenses............... 11,660 1,639 162 13,461
------- ------ ------- -------
Operating income............ 2,341 554 (190) 2,705
Total other expense......... (83) -- (176)(d) (259)
------- ------ ------- -------
Income before income taxes.. 2,258 554 (366) 2,446
Income taxes................ 867 169 (140) (e) 896
------- ------ ------- -------
Net income.................. $ 1,391 $ 385 $ (226) $ 1,550
======= ====== ======= =======
Net income per share........ $ 0.41 $ 0.46
Shares used in per share
calculation................ 3,376 3,376(3)
</TABLE>
See notes to pro forma condensed combining financial statements.
F-17
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES AND
SENSORY SYSTEMS LIMITED AND SUBSIDIARY
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SENSORY
TELESENSORY SYSTEMS
CORPORATION LIMITED
AND AND PRO FORMA PRO FORMA
SUBSIDIARIES SUBSIDIARY ADJUSTMENTS COMBINED
------------ ---------- ----------- ---------
(1) (2)
<S> <C> <C> <C> <C>
Net revenue.................. $17,240 $1,334 $(520)(b) $18,054
Cost of revenue.............. 9,795 878 (522)(b) 10,151
------- ------ ----- -------
Gross profit................. 7,445 456 2 7,903
------- ------ ----- -------
Operating expenses:
Product development........ 1,129 -- -- 1,129
Sales, general and
administrative............ 4,885 436 40 (c) 5,361
------- ------ ----- -------
Total operating
expenses................ 6,014 436 40 6,490
------- ------ ----- -------
Operating income............. 1,431 20 (38) 1,413
Total other income
(expense)................... (67) 21 (44)(d) (90)
------- ------ ----- -------
Income before income taxes... 1,364 41 (82) 1,323
Income taxes................. 213 16 (31)(e) 198
------- ------ ----- -------
Net income................... $ 1,151 $ 25 $ (51) $ 1,125
======= ====== ===== =======
Net income per share......... $ 0.35 $ 0.34
Shares used in per share
calculation................. 3,300 3,300(3)
</TABLE>
See notes to pro forma condensed combining financial statements.
F-18
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
AND SENSORY SYSTEMS LIMITED
NOTES TO PRO FORMA CONDENSED
COMBINING FINANCIAL INFORMATION (UNAUDITED)
(1) The weighted average exchange rate of $1.58 for the year ended December
31, 1995 and $1.52 for the six-month period ended June 30, 1996 was used
to translate revenues and expenses of SSL from pounds sterling to U.S.
dollars in the unaudited pro forma condensed combining statements of
operations. The unaudited pro forma condensed combining statements of
operations of the Company have been prepared in accordance with generally
accepted accounting principles in the U.S.
(2) The following significant assumptions were applied to the historical
statements of operations of the Company and SSL to arrive at the unaudited
pro forma condensed combining statements of operations:
(a) The unaudited pro forma condensed combining statements of operations
have been prepared as if the merger was completed as of January 1,
1995, the beginning of the earliest period presented. The unaudited pro
forma combined net income per share gives effect to the number of
shares issued had the merger taken place as of January 1, 1995.
(b) To eliminate intercompany revenues and associated profit.
(c) For purposes of the unaudited pro forma condensed combining statement
of operations, goodwill acquired is amortized over a period of fifteen
years and the covenant not to compete is amortized over six years.
Amortization is $40,000 for the six months ended June 30, 1996 and
$162,000 for the twelve months ended December 31, 1995.
(d) For purposes of the unaudited pro forma condensed combining statement
of operations, interest expense has been adjusted at the average
borrowing rate for fiscal 1995 and six months ended June 30, 1996,
under the assumption that the Company would have to borrow the amount
of cash paid and acquisition costs incurred. The average rate used was
10% for the six months ended June 30, 1996 and for the year ended
December 31, 1995. Interest expense has been adjusted by $44,000 and
$176,000 for the six months ended June 30, 1996 and the year ended
December 31, 1995, respectively.
(e) To record estimated tax benefit of the above entries.
(3) The 125,000 shares of common stock issued in connection with the
acquisition of Sensory Systems Limited and Subsidiary have already been
reflected in shares for Telesensory Corporation and Subsidiaries.
* * * * *
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated balance sheets of Sensory Systems Limited
and subsidiary as of December 31, 1994 and 1995, and the related consolidated
profit and loss accounts and statement of cash flows for the years then ended,
expressed in pounds sterling. 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 in the United Kingdom and the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements, referred to above,
present fairly, in all material respects, the financial position of Sensory
Systems Limited and subsidiary as of December 31, 1994 and 1995, and the
results of their operations for the years then ended in conformity with
generally accepted accounting principles in the United Kingdom.
/s/ Keith Jones
Keith Jones Chartered Accountant Registered Auditor
3 Tudor Grove Church Crescent London N20 0JW
27 March 1996
F-20
<PAGE>
SENSORY SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 1995
<TABLE>
<CAPTION>
NOTES 1995 1994
----- ------------------ ------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Tangible Assets................. 2 126,632 129,370
CURRENT ASSETS
Stock........................... 4 413,253 277,897
Debtors......................... 5 513,250 513,718
Cash Balances................... 381,066 398,964
--------- ---------
1,307,569 1,190,579
LESS CREDITORS--AMOUNTS FALLING
DUE WITHIN 1 YEAR................ 6 591,753 690,275
--------- ---------
NET CURRENT ASSETS................ 715,816 500,304
------- -------
842,448 629,674
======= =======
FINANCED BY CAPITAL AND RESERVES
Called up Share Capital......... 7 100 100
Profit and Loss Account......... 8 842,348 629,574
------- -------
842,448 629,674
======= =======
</TABLE>
Approved by the Board on 27 March 1996
/s/ J. F. Tillisch
- -------------------------------------
(J. F. Tillisch)
/s/ S. Forde
- -------------------------------------
(S. Forde)
F-21
<PAGE>
SENSORY SYSTEMS LIMITED
BALANCE SHEET AT 31 DECEMBER 1995
<TABLE>
<CAPTION>
NOTES 1995 1994
----- ------------------ ------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Tangible Assets................. 2 86,526 82,173
Investments..................... 3 6,024 6,024
CURRENT ASSETS
Stock........................... 4 277,686 213,102
Debtors......................... 5 805,390 576,032
Cash Balances................... 341,229 386,800
--------- ---------
1,424,305 1,175,934
LESS CREDITORS--AMOUNTS FALLING
DUE WITHIN 1 YEAR................ 6 532,684 573,462
--------- ---------
NET CURRENT ASSETS................ 891,621 602,472
------- -------
984,171 690,669
======= =======
FINANCED BY CAPITAL AND RESERVES
Called up Share Capital......... 7 100 100
Profit and Loss Account......... 8 984,071 690,569
------- -------
984,171 690,669
======= =======
</TABLE>
Approved by the Board on 27 March 1996
/s/ J. F. Tillisch
- -------------------------------------
(J. F. Tillisch)
/s/ S. Forde
- -------------------------------------
(S. Forde)
F-22
<PAGE>
SENSORY SYSTEMS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
YEAR ENDED 31 DECEMBER 1995
<TABLE>
<CAPTION>
NOTES 1995 1994
----- --------- ---------
(Pounds) (Pounds)
<S> <C> <C> <C>
Turnover............................................ 1 3,138,533 2,854,272
Cost of Sales....................................... 1,751,681 1,825,898
--------- ---------
Gross Profit........................................ 1,386,852 1,028,374
Administrative Expenses............................. 1,037,115 886,576
--------- ---------
Profit from continuing operations on ordinary
activities before taxation......................... 8 349,737 141,798
Taxation............................................ 10 106,963 38,000
--------- ---------
Profit for the financial year....................... 242,774 103,798
Dividends........................................... 11 30,000 23,000
--------- ---------
Retained profit for the year........................ 212,774 80,798
Retained profit brought forward..................... 9 629,574 548,776
--------- ---------
Retained profit carried forward..................... 842,348 629,574
========= =========
</TABLE>
Other than the profit for the years, the group has made no other recognised
gains or losses.
F-23
<PAGE>
SENSORY SYSTEMS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Cash flows from operating activities:
Profit for the financial year............................. 242,774 103,798
Adjustments to reconcile profit for the financial year to
net cash provided by operating activities:
Depreciation and amortization............................ 61,906 61,446
Loss on disposal of assets............................... 14,116 15,490
Changes in assets and liabilities that provided (used)
cash:
Stock................................................... (135,356) (149,087)
Debtors................................................. 468 32,775
Trade creditors......................................... 64,842 109,611
Corporation tax......................................... 75,013 (14,510)
Other creditors......................................... 21,978 (16,642)
Accruals................................................ (23,043) 41,212
-------- --------
Net cash provided by operating activities............... 322,698 184,093
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets............................... (77,637) (144,023)
Sale of fixed assets...................................... 4,353 9,945
Sale of investment property............................... -- 141,103
-------- --------
Net cash (used in) provided by investing activities..... (73,284) 7,025
-------- --------
Cash flows from financing activities:
Bank overdrafts........................................... (237,312) 97,018
Dividends................................................. (30,000) (23,000)
-------- --------
Net cash (used in) provided by financing activities..... (267,312) 74,018
-------- --------
Net (decrease) increase in cash............................ (17,898) 265,136
Cash balances, beginning of year........................... 398,964 133,828
-------- --------
Cash balances, end of year................................. 381,066 398,964
======== ========
</TABLE>
F-24
<PAGE>
SENSORY SYSTEMS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
YEAR ENDED 31 DECEMBER 1995
1. ACCOUNTING POLICIES
a) The financial statements are based on the historical cost convention.
b) Depreciation is calculated to write down the assets to their residual
values at varying rates between 10% and 25% on the reducing balance.
c) Provision is made for deferred taxation arising from the excess of
capital allowances over depreciation charged and other timing
differences to the extent that it is considered the liability will
crystallise in the foreseeable future.
d) Turnover represents invoiced sales to customers excluding VAT. Income
from maintenance contracts is included in the profit and loss account
in the period in which such income is invoiced.
e) The consolidated financial statements incorporate the financial
statements of Sensory Systems Limited and its subsidiary company
Teletec Sarl all of which are made up to 31 December 1995.
2. TANGIBLE ASSETS
<TABLE>
<CAPTION>
GROUP COMPANY
FIXTURES FIXTURES
& VEHICLES & VEHICLES
---------- ----------
(Pounds) (Pounds)
<S> <C> <C>
COST--1 January 1995...................................... 267,031 209,208
Disposals................................................. (13,955) (13,955)
Additions................................................. 42,395 35,242
------- -------
At 31 December 1995....................................... 295,471 230,495
------- -------
DEPRECIATION--1 January 1995.............................. 137,661 127,035
Eliminated on Disposal.................................... (6,897) (6,897)
Charge for year........................................... 38,075 23,831
------- -------
At 31 December 1995....................................... 168,839 143,969
------- -------
Net book value of 31 December 1995........................ 126,632 86,526
======= =======
</TABLE>
3. INVESTMENTS
Investments represent the cost of 100% of the issued share capital of
Teletec Sarl, a company incorporated in France, which is engaged in similar
activities to that of Sensory Systems Limited.
4. STOCK
Stock represents goods for resale.
5. DEBTORS
<TABLE>
<CAPTION>
GROUP COMPANY
----------------- -----------------
1995 1994 1995 1994
-------- -------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Trade Debtors............................... 411,370 439,801 323,026 332,613
Prepayments................................. 58,411 73,917 36,992 68,917
Amount owed by group undertakings........... -- -- 401,903 174,502
Other Debtors............................... 43,469 -- 43,469 --
------- ------- ------- -------
513,250 513,718 805,390 576,032
======= ======= ======= =======
</TABLE>
F-25
<PAGE>
SENSORY SYSTEMS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED 31 DECEMBER 1995
6. CREDITORS
Amounts falling due within one year.
<TABLE>
<CAPTION>
GROUP COMPANY
----------------- -----------------
1995 1994 1995 1994
-------- -------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Trade Creditors............................. 376,809 311,967 368,849 271,335
Bank Overdrafts............................. -- 237,312 -- 237,312
Corporation Tax............................. 107,263 32,250 107,263 32,250
Other Creditors............................. 49,094 27,116 -- 2,565
Accruals.................................... 58,587 81,630 56,572 30,000
------- ------- ------- -------
591,753 690,275 532,684 573,462
======= ======= ======= =======
</TABLE>
The bank overdrafts are secured by a debenture in favour of the bank.
7. SHARE CAPITAL
<TABLE>
<CAPTION>
GROUP & GROUP &
COMPANY COMPANY
1995 1994
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Ordinary shares (Pounds)1 each authorised, issued and fully
paid....................................................... 100 100
=== ===
</TABLE>
8. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION IS AFTER CHARGING
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Bank Interest.......................................... 13,197 13,416
Depreciation........................................... 38,075 36,036
Directors' remuneration (see below).................... 142,952 112,625
And after crediting audit fee.......................... 1,500 1,500
Interest receivable.................................... 13,548 10,864
The remuneration of the Chairman was................... 26,004 25,337
The remuneration of the highest paid director was...... 37,555 32,755
</TABLE>
The remuneration of the Directors, and the highest paid director including
the Chairman, were within the following ranges:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
(Pounds)25,001-(Pounds)30,000................................... 1 2
(Pounds)30,001-(Pounds)35,000................................... 1 1
(Pounds)35,001-(Pounds)40,000................................... 1 --
</TABLE>
F-26
<PAGE>
SENSORY SYSTEMS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED 31 DECEMBER 1995
9. STAFF COSTS AND NUMBERS
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Wages and Salaries...................................... 457,022 409,857
Social Security Costs................................... 67,664 63,456
Pension Costs........................................... 63,577 33,855
------- -------
588,263 507,168
======= =======
</TABLE>
The above figures exclude redundancy costs of (Pounds)3,500 (1994-
(Pounds)3,000) which have been charged to the profit and loss account.
<TABLE>
<CAPTION>
NUMBER NUMBER
------ ------
<S> <C> <C>
Office and Management...................................... 20 20
--- ---
</TABLE>
10. TAXATION
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
U.K. Corporation Tax on the profit for the year......... 106,963 38,000
======= ======
</TABLE>
The Company is a "close company" as defined by The Taxes Act.
11. DIVIDENDS
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Interim dividend paid 1 July 1994....................... -- 23,000
First interim dividend paid 6 April 1995................ 10,000 --
Second interim dividend paid 17 July 1995............... 10,000 --
Third interim dividend paid 31 December 1995............ 10,000 --
------ ------
30,000 23,000
====== ======
</TABLE>
12. CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS
There are no contingent liabilities or capital commitments at 31 December
1995 or at 31 December 1994.
13. PENSIONS
The group operates a defined contribution pension scheme for invited
employees. The assets of the scheme are held separately from those of the
company in an independently administered fund. The pension cost charge
represents contributions payable by the company to the fund and amounted to
(Pounds)63,577 (1994-(Pounds)33,855).
F-27
<PAGE>
SENSORY SYSTEMS LIMITED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED 31 DECEMBER 1995
14. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Retained profit for the financial year.................. 212,774 80,798
Opening Shareholders' funds............................. 629,674 548,876
------- -------
Closing Shareholders' funds............................. 842,448 629,674
======= =======
</TABLE>
The difference between the values of shareholders funds shown on the
Consolidated and Company Balance Sheets represents the deficiency of
shareholders funds of Teletec Sarl of (Pounds)141,723 which from the company's
point of view is deemed to be fully recoverable.
15. COMPANY PROFIT AND LOSS ACCOUNT
Sensory Systems Limited has not presented its own profit and loss account as
permitted by Section 230(1) of the Companies Act 1985. The amount of the
consolidated profit for the year before tax dealt with in the financial
statements of the company is a profit of (Pounds)430,465 (1994-
(Pounds)202,793).
F-28
<PAGE>
Blindness Products
BRAILLE CELLS
This electronically
refreshable braille cell
provides tactile informa-
tion by means of a 2x4
array of plastic pins
which are raised or low-
ered individually by
electrically energized
bimorphic piezo electric
reeds. The raised pins
form a pattern of dots
corresponding to a single
braille character which a
blind person can read
with his fingertips.
REFRESHABLE BRAILLE
DISPLAYS
In refreshable braille
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<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING DE-
SCRIBED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 25
Management............................................................... 34
Certain Relationships and Related Transactions........................... 43
Principal and Selling Shareholders....................................... 44
Description of Capital Stock............................................. 46
Shares Eligible for Future Sale.......................................... 47
Underwriting............................................................. 49
Legal Matters............................................................ 50
Experts.................................................................. 50
Additional Information................................................... 50
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,900,000 SHARES
LOGO
COMMON STOCK
PROSPECTUS
JEFFERIES & COMPANY, INC.
VAN KASPER & COMPANY
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Shares being registered. All of the amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 15,000
NASD Filing Fee.................................................... 5,000
Nasdaq National Market Listing Fee................................. 50,000
Blue Sky Qualification Fees and Expenses........................... 4,000
Printing and Engraving Expenses.................................... 200,000
Legal Fees and Expenses............................................ 280,000
Accounting Fees and Expenses....................................... 210,000
Transfer Agent and Registrar Fees.................................. 30,000
Miscellaneous...................................................... 6,000
--------
TOTAL............................................................ $800,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 204(a) of the California General Corporation Law,
the Registrant's Articles of Incorporation eliminate a director's personal
liability for monetary damages to the Registrant and its shareholders arising
form a breach or alleged breach of the director's fiduciary duty, except for
liability arising under Sections 310 and 316 of the California General
Corporation Law or liability for (i) acts or omissions that involve
intentional misconduct or knowing and culpable violation of law, (ii) acts or
omissions that a director believes to be contrary to the best interests of the
Registrant or its shareholders or that involve the absence of good faith on
the part of the director, (iii) any transaction from which a director derived
an improper personal benefit, (iv) acts or omissions that show a reckless
disregard for the director's duty to the Registrant or its shareholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the Registrant or its shareholders, (v) acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the Registrant or its shareholders, (vi) interested
transactions between the corporation and a director in which a director has a
material financial interest, and (vii) liability for improper distributions,
loans or guarantees. This provision does not eliminate the directors' duty of
care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
California law.
Sections 204(a) and 317 of the California General Corporation Law authorize
a corporation to indemnify its directors, officers, employees and other agents
in terms sufficiently broad to permit indemnification (including reimbursement
for expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Articles of Incorporation and Bylaws contain provisions covering
indemnification to the maximum extent permitted by the California General
Corporation Law of corporate directors, officers and other agents against
certain liabilities and expenses incurred as a result of proceedings involving
such persons in their capacities as directors, officers employees or agents,
including proceedings under the Securities Act or the Securities Exchange Act
of 1934, as amended. The Company has entered into Indemnification Agreements
with its directors and executive officers.
In addition to the foregoing, the Underwriting Agreement provides for
indemnification by the Underwriters of the Registrant, its directors and
officers, and by the Registrant of the several Underwriters, against certain
liabilities, including liabilities arising under the Securities Act.
II-1
<PAGE>
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1993, the Registrant has issued and sold (without payment of
any selling commission to any person) 44,700 shares of Common Stock to 16
employees and consultants at prices ranging from $0.96--$3.60 per share, upon
exercise of stock options and stock purchase rights, pursuant to the
Registrant's 1977 Stock Option Plan and the 1985 Plan.
In October 1994, the Registrant issued and sold (without payment of any
selling commission to any person) 25,000 shares of Common Stock to H.W. Jesse
& Co. at a price of $2.40 per share.
In March 1996, the Registrant issued and sold (without payment of any
selling commission to any person) 125,000 shares of Common Stock to John
Tillisch Limited, formerly Sensory Systems Limited, at a price of $5.60 per
share.
In April 1996, the Registrant issued and sold (without payment of any
selling commission to any person) 25,000 shares of Common Stock to John M.
Lillie and Daryl L. Lillie, Trustees, Lillie Family Trust at a price of $6.00
per share.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section
3(b) of the Securities Act, as transactions by an issuer not involving a
public offering or transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and instruments issued in such transactions.
All recipients had adequate access, through their relationship with the
Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Restated Articles of Incorporation of Registrant currently
in effect.
3.3 Bylaws of Registrant, as currently in effect.
4.1 Form of Common Stock Certificate.
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1 1985 Incentive Stock Option Plan.
10.2(degrees) 1993 Stock Option Plan and forms of agreements thereunder.
10.3+ 1995 Stock Plan and forms of agreements thereunder.
10.4 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.5 Forms of Indemnification Agreements between Registrant and
its officers and directors.
10.6 1996 Management/Professional Profit Sharing Plan
10.7 1996 Employee Profit Sharing Plan
10.8 Subordination, Nondisturbance, and Attornment Agreement
among William E. Jarvis, Duane E. Dunwoodie and Marlene J.
Dunwoodie, Peter D. Lacy and Registrant, dated June 26,
1992, regarding Registrant's facility located at 455 North
Bernardo Road, Mountain View, California.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.9 Industrial Lease Agreement between Joint Land Development Company
Number Two and Registrant, dated June 26, 1992, and amendments
thereto, for the Registrant's facility located at 455 North
Bernardo Road, Mountain View, California.
10.10 Loan and Security Agreement between Registrant and Comerica Bank-
California, dated November 30, 1993, and six modifications
thereof.
10.11 Lease Agreement between Waterglade Developments (Edgware Road)
Limited, dated June 2, 1993, and Sensory Systems Limited for
Sensory Systems Limited's facility located at 303 Edgware Road,
London NW9, England.
10.12 Stock Purchase Agreement among Registrant, James C. Bliss and
Carolyn Joan Bliss, Trustees of the James C. Bliss and Carolyn
Joan Bliss Trust u/d/t dated October 11, 1979, Judith Bliss and
John Bliss, and certain shareholders of Registrant, dated April
9, 1995.
10.13 Variable Rate Installment Note issued by Registrant to Comerica
Bank-California in the amount of $250,000.00, dated April 12,
1995.
10.14 Variable Rate Installment Note issued by Registrant to Comerica
Bank-California in the amount of $750,000.00, dated April 12,
1995.
10.15(1) Variable Rate Installment Note issued by Registrant to Comerica
Bank-California in the amount of $1,000,000, dated March 22,
1996.
10.16(2) Asset Purchase Agreement among VTEK, Registrant, Sensory Systems
Limited and John F. Tillisch, dated March 29, 1996.
10.17 Employment Agreement between Sensory Systems Limited and John F.
Tillisch, dated March 29, 1996.
10.18(3) Noncompetition Agreement among VTEK, Inc., Registrant, Sensory
Systems Limited and John F. Tillisch, dated March 29, 1996.
11.1 Statement of computation of per share earnings.
21.1 Subsidiaries of Registrant
23.1(a) Consent of Deloitte & Touche LLP, Independent Auditors (see page
II-7).
23.1(b) Consent of Keith Jones FCA, Independent Auditors (see page II-8).
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in
Exhibit 5.1).
24.1 Power of Attorney (See page II-5).
27.1 Financial Data Schedule
</TABLE>
- ----------------
* To be filed by amendment.
+ Supersedes exhibit previously filed.
(degrees)Supplements exhibit previously filed.
(1) Previously filed as exhibit 10.17.
(2) Previously filed as exhibit 10.18.
(3) Previously filed as exhibit 10.20.
(b) Financial Statement Schedule:
II--Valuation and Qualifying Accounts
All other Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer of 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.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933 (the "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 Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide Offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mountain View, State of California, on the 6th day
of September, 1996.
TELESENSORY CORPORATION
By /s/ Larry Israel
(LARRY ISRAEL)
CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE
OFFICER
AND DIRECTOR
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Larry Israel Chairman, President, September 6,
- ------------------------------------- Chief Executive 1996
(LARRY ISRAEL) Officer and
Director (Principal
Executive Officer)
Vice President,
/s/ Robert W. Kamenski* Finance and Chief September 6,
- ------------------------------------- Financial Officer 1996
(ROBERT W. KAMENSKI) (Principal
Financial and
Accounting Officer)
Director
/s/ Mitchell Gooze* September 6,
- ------------------------------------- 1996
(MITCHELL GOOZE)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John F. Harper* Director September 6,
- ------------------------------------- 1996
(JOHN F. HARPER)
/s/ Seymour Liebman* Director September 6,
- ------------------------------------- 1996
(SEYMOUR LIEBMAN)
Director
/s/ John M. Lillie* September 6,
- ------------------------------------- 1996
(JOHN M. LILLIE)
/s/ John G. Linvill* Director September 6,
- ------------------------------------- 1996
(JOHN G. LINVILL)
/s/ Peter D. Stent* Director September 6,
- ------------------------------------- 1996
(PETER D. STENT)
*By /s/ Larry Israel
- -------------------------------------
LARRY ISRAEL
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-09295 of Telesensory Corporation and subsidiaries on Form S-1 of our
report dated February 23, 1996 (August 14, 1996 as to the second and third
sentences of Note 1 to the Consolidated Financial Statements), appearing in
the Prospectus, which is part of this Registration Statement, and of our
report dated February 23, 1996 (August 14, 1996 as to the second and third
sentences of Note 1 to the Consolidated Financial Statements) relating to the
consolidated financial statement schedule appearing elsewhere in this
Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
September 4, 1996
----------------
II-7
<PAGE>
EXHIBIT 23.1(B)
[LETTERHEAD OF KEITH JONES FCA]
Our Ref: KJ/lam
Your Ref: BK/JFT
Mr. Kamenski
Telesensory Corporation
455 North Bernardo Avenue
Mountain View, California 94039
Dear Mr. Kamenski,
INDEPENDENT AUDITORS' CONSENT--SENSORY SYSTEMS LIMITED
We consent to the use in this Registration Statement of Telesensory
Corporation on Form S-1 of our report on Sensory Systems Limited and Subsidiary
dated 27 March 1996, appearing in the Prospectus, which is part of this
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
Yours sincerely,
/s/ Keith Jones
-------------------------------------
Keith Jones
London, England
4 September 1996
II-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Telesensory Corporation:
We have audited the consolidated financial statements of Telesensory
Corporation and subsidiaries as of December 31, 1995 and 1994, and for each of
the three years in the period ended December 31, 1995, and have issued our
report thereon dated February 23, 1996 (August 14, 1996 as to the second and
third sentences of Note 1 to the Consolidated Financial Statements) included
elsewhere in this Registration Statement. Our audits also included the
financial statement schedule listed in Item 16(b)II of this Registration
Statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
February 23, 1996 (August 14, 1996
as to the second and third sentences
of Note 1 to the Consolidated Financial Statements)
S-1
<PAGE>
TELESENSORY CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGE TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- ----------- ---------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts
Year ended December
31,
1993................ $ 73 $ 23 -- $ 31 $ 65
1994................ $ 65 $ 20 -- $ 35 $ 50
1995................ $ 50 $ 63 -- $ 11 $102
Warranty reserves
Year ended December
31,
1993................ $824 $ 822 -- $1,300 $346
1994................ $346 $1,066 -- $1,128 $284
1995................ $284 $ 340 -- $ 202 $422
</TABLE>
- --------
(1) Represents costs charged to the respective reserve account.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Restated Articles of Incorporation of Registrant currently in
effect.
3.3 Bylaws of Registrant, as currently in effect.
4.1 Form of Common Stock Certificate.
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1 1985 Incentive Stock Option Plan and forms of agreements
thereunder.
10.2(degrees) 1993 Stock Option Plan and forms of agreements thereunder.
10.3+ 1995 Stock Plan and forms of agreements thereunder.
10.4 Employee Stock Purchase Plan and forms of agreements thereunder.
10.5 Forms of Indemnification Agreements between Registrant and its
officers and directors.
10.6 1996 Management/Professional Profit Sharing Plan
10.7 1996 Employee Profit Sharing Plan
10.8 Subordination, Nondisturbance, and Attornment Agreement among
William E. Jarvis, Duane E. Dunwoodie and Marlene J. Dunwoodie,
Peter D. Lacy and Registrant, dated June 26, 1992, regarding
Registrant's facility located at 455 North Bernardo Road,
Mountain View, California.
10.9 Industrial Lease Agreement between Joint Land Development
Company Number Two and Registrant, dated June 26, 1992, and
amendments thereto, for the Registrant's facility located at 455
North Bernardo Road, Mountain View, California.
10.10 Loan and Security Agreement between Registrant and Comerica
Bank-California, dated November 30, 1993, and six modifications
thereof.
10.11 Lease Agreement between Waterglade Developments (Edgware Road)
Limited, dated June 2, 1993, and Sensory Systems Limited for
Sensory Systems Limited's facility located at 303 Edgware Road,
London NW9, England.
10.12 Stock Purchase Agreement among Registrant, James C. Bliss and
Carolyn Joan Bliss, Trustees of the James C. Bliss and Carolyn
Joan Bliss Trust u/d/t dated October 11, 1979, Judith Bliss and
John Bliss, and certain shareholders of Registrant, dated April
9, 1995.
10.13 Variable Rate Installment Note issued by Registrant to Comerica
Bank-California in the amount of $250,000.00, dated April 12,
1995.
10.14 Variable Rate Installment Note issued by Registrant to Comerica
Bank-California in the amount of $750,000.00, dated April 12,
1995.
10.15(1) Variable Rate Installment Note issued by Registrant to Comerica
Bank-California in the amount of $1,000,000, dated March 22,
1996.
10.16(2) Asset Purchase Agreement among VTEK, Registrant, Sensory Systems
Limited and John F. Tillisch, dated March 29, 1996.
10.17 Employment Agreement between Sensory Systems Limited and John F.
Tillisch, dated March 29, 1996.
10.18(3) Noncompetition Agreement among VTEK, Inc., Registrant, Sensory
Systems Limited and John F. Tillisch, dated March 29, 1996.
11.1 Statement of computation of per share earnings.
21.1 Subsidiaries of Registrant
23.1(a) Consent of Deloitte & Touche LLP, Independent Auditors (see page
II-7).
23.1(b) Consent of Keith Jones FCA, Independent Auditors (see page II-
8).
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in
Exhibit 5.1).
24.1 Power of Attorney (See page II-5).
27.1 Financial Data Schedule
</TABLE>
- ----------------
*To be filed by amendment.
+Supersedes exhibit previously filed.
(degrees)Supplements exhibit previously filed.
(1)Previously filed as exhibit 10.17.
(2)Previously filed as exhibit 10.18.
(3)Previously filed as exhibit 10.20.
<PAGE>
EXHIBIT 1.1
TELESENSORY CORPORATION
(a California corporation)
2,900,000 Shares/1/
UNDERWRITING AGREEMENT
----------------------
September ___, 1996
JEFFERIES & COMPANY, INC.
VAN KASPER & COMPANY
As Representatives of
the Several Underwriters
c/o Jefferies & Company, Inc.
Attn: Syndicate Department
650 Fifth Avenue, 4th Floor
New York, New York 10019
Dear Sirs:
Telesensory Corporation, a California corporation (the "Company"), and
certain shareholders of the Company named in Schedule II hereto (hereinafter
called the "Selling Shareholders"), hereby confirm their agreement with you, as
representatives (the "Representatives") of the underwriters named in Schedule I
hereto (the "Underwriters"), with respect to the sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of 2,275,000
shares (the "Company Shares") of Common Stock, $.02 par value per share, (the
"Common Stock") and with respect to the sale by the Selling Shareholders and the
purchase by the Underwriters, acting severally and not jointly, of 625,000
shares (the "Selling Shareholder Shares") of Common Stock. The Company Shares
and the Selling Shareholder Shares are hereinafter collectively referred to as
the "Firm Shares." The Company also proposes to grant to the Underwriters an
option to purchase up to 435,000 additional shares (the "Option Shares") of
Common Stock to cover over-allotments, if any. The Firm Shares and the Option
Shares are hereinafter collectively referred to as the "Shares."
You have advised us that you desire to purchase the Shares and that you
propose to make a public offering of the Shares as soon as you deem advisable
after the Registration Statement referred to below becomes effective.
The terms which follow, when used in this Agreement, shall have the
meanings indicated. "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in Section 1(a)(i) below and any preliminary prospectus
included in the Registration Statement on the date that the
- ---------------------------
/1/ Plus an option to purchase up to 435,000 additional shares from the Company
to cover over-allotments.
<PAGE>
Registration Statement becomes effective (the "Effective Date") that omits Rule
430A Information (as defined below). "Registration Statement" shall mean the
registration statement referred to in Section 1(a)(i) below, including exhibits,
as amended at the Representation Date (as defined below) (or, if not effective
at the Representation Date, in the form in which it shall become effective) and,
in the event any post-effective amendment thereto becomes effective prior to the
Closing Date (as defined in Section 3 hereof), shall also mean such registration
statement as so amended. Such term shall include Rule 430A Information deemed to
be included therein at the Effective Date as provided by Rule 430A. The
prospectus constituting a part of the Registration Statement (including the Rule
430A Information) as from time to time amended or supplemented, is hereinafter
referred to as the "Prospectus," except that if any revised prospectus shall be
provided to the Underwriters by the Company which differs from the prospectus on
file at the Securities and Exchange Commission (the "Commission") at the
Effective Date (whether or not such revised prospectus is required to be filed
by the Company pursuant to Rule 424 of the Act Regulations), the term
"Prospectus" shall refer to each such revised prospectus from and after the time
it is first provided to the Underwriters for such use. "Rule 158," "Rule 424"
and "Rule 430A" refer to such rules under the Securities Act of 1933, as amended
(the "Act"; the rules and regulations under the Act, the "Act Regulations").
"Rule 430A Information" means information with respect to the Shares and the
offering thereof permitted to be omitted from the Registration Statement when it
becomes effective pursuant to Rule 430A.
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
(a) The Company represents and warrants to the Underwriters as of the date
hereof (such date being referred to as the "Representation Date") and as of the
Closing Date, as follows:
(i) The Company has filed with the Commission a registration
statement on Form S-1 (Registration No. 333-09295), including a related
preliminary prospectus, and one or more amendments thereto, including the
related preliminary prospectus, each of which has previously been furnished
to the Underwriters, for the registration under the Act of the offering and
sale of the Shares. The Company will file with the Commission either (A)
prior to effectiveness of such registration statement, a further amendment
to such registration statement (including the form of final prospectus) or
(B) after effectiveness of such registration statement, a final prospectus
in accordance with Rules 430A and 424(b) of the Act Regulations. The
Company has included in such registration statement, as amended at the
Effective Date, all information (other than Rule 430A Information in the
case of clause (B)) required by the Act and the Act Regulations to be
included in the prospectus with respect to the Shares and the offering
thereof. As filed, such amendment and form of final prospectus, or such
final prospectus, shall contain all Rule 430A Information, together with
all other such required information, with respect to the Shares and the
offering thereof and, except to the extent the Underwriters shall agree in
writing to a modification, shall be in all substantive respects in the form
furnished to the Underwriters prior to the date hereof.
(ii) On the Effective Date, the Representation Date and the Closing
Date, the Registration Statement did and will, and when the Prospectus is
first filed (if required) in accordance with Rule 424(b) and on the
Representation Date and the Closing Date, the
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<PAGE>
Prospectus will, comply in all material respects with the applicable
requirements of the Act and the Act Regulations; there is no agreement,
contract, lease or other document or instrument that is required to be
described in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement that is not described or filed as
required; on the Effective Date, the Representation Date and the Closing
Date, the Registration Statement did not 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 in order to make the statements therein not
misleading; and, on the Effective Date, the Representation Date and the
Closing Date, and on the date of any filing pursuant to Rule 424(b), the
Prospectus did not and will not include any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, that the Company makes no representation or
warranty as to the information provided in writing to the Company by or on
behalf of the Underwriters, expressly for use in the Registration Statement
or the Prospectus, and the Company agrees that the only information
provided in writing by or on behalf of the Underwriters to the Company,
expressly for use in the Registration Statement or the Prospectus, is that
information contained in the table and the second paragraph following the
table in the section of the Prospectus entitled "Underwriting."
(iii) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of California, with
full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and
the Prospectus, and is duly registered and qualified to conduct its
business and is in good standing in each jurisdiction where the nature or
location of its properties (owned or leased) or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a Material Adverse Effect. As used
herein, the term "Material Adverse Effect" shall mean an adverse effect on
the condition (financial or other), business, properties, net worth or
results of operations of the Company or any of the Subsidiaries (as
hereinafter defined) that is or would be, singly or in the aggregate,
material to the Company and the Subsidiaries taken as a whole, whether or
not occurring in the ordinary course of business.
(iv) The only subsidiaries (as defined in the Act Regulations) of the
Company are the subsidiaries listed on Schedule III hereto (collectively,
the "Subsidiaries"). Each of the Subsidiaries is a corporation duly
organized and validly existing in good standing in the jurisdiction of its
incorporation with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and in the Prospectus, and is duly registered and
qualified to conduct its business and is in good standing in each
jurisdiction where the nature or location of its properties (owned or
leased) or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not
have a Material Adverse Effect.
(v) Each of the Company and the Subsidiaries has all necessary
authorizations, approvals, orders, licenses, rights-of-way, operating
rights, easements, certificates and
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permits of and from, and has made all declarations and filings with, all
regulatory or governmental officials and bodies, all self-regulatory
organizations and all courts and other tribunals ("Permits"), to own or
lease its respective properties and to conduct its respective businesses
described in the Prospectus and the Registration Statement, except where
failure to have obtained or made the same will not have a Material Adverse
Effect, and neither the Company nor any of the Subsidiaries has received
any notice of proceedings relating to the revocation or modification of any
such Permits, if the failure to be so licensed or approved or if the
subject of an unfavorable decision, ruling or finding, would have a
Material Adverse Effect; the Company and each of the Subsidiaries has
fulfilled and performed all its current material obligations with respect
to such Permits and no event has occurred that allows, or after notice or
lapse of time, or both, would allow, revocation or termination thereof or
result in any other material impairment of the rights of the holder of any
such Permit; and such Permits contain no restrictions that are materially
burdensome to the Company and the Subsidiaries; and the Company and each of
the Subsidiaries is in compliance with all applicable laws, rules,
regulations, orders and consents, the violation of which could have a
Material Adverse Effect. The property and business of the Company and the
Subsidiaries conform in all material respects to the descriptions thereof
contained in the Prospectus and the Registration Statement.
(vi) All of the Company's outstanding capital stock has been duly
authorized, validly issued and is fully paid and nonassessable and the
capitalization of the Company conforms to the descriptions thereof and the
statements made with respect thereto in the Registration Statement and the
Prospectus as of the date set forth therein. There are no outstanding
securities convertible into or exchangeable for, and no outstanding
options, warrants or other rights to purchase, any shares of the capital
stock of the Company, nor any agreements or commitments to issue any of the
same, except as described in the Registration Statement and the Prospectus,
and there are no preemptive or other rights to subscribe for or to
purchase, and no restrictions upon the voting or transfer of, any capital
stock of the Company pursuant to the Company's articles of incorporation or
by-laws or any agreement or other instrument to which the Company is a
party, except as described in the Registration Statement and the
Prospectus.
(vii) All the outstanding capital stock of each Subsidiary has been
duly authorized, validly issued and is fully paid and nonassessable and was
not issued in violation of or subject to any preemptive or similar rights.
Except as otherwise set forth in the Registration Statement and the
Prospectus, all outstanding capital stock of the Subsidiaries is owned by
the Company, directly or indirectly through another Subsidiary, free and
clear of any security interests, liens, encumbrances, equities or other
claims.
(viii) Each of the Company and the Subsidiaries has good and
indefeasible title to all real property and good and marketable title to
all personal property owned by it, including those properties described in
the Registration Statement and Prospectus, in each case free and clear of
all liens, charges, encumbrances and restrictions, except such as are
described in the Registration Statement and Prospectus or such as are not
burdensome and do not interfere with the use or proposed use of the
property or the conduct of the business of the Company or the Subsidiaries
in a manner that would have a Material
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<PAGE>
Adverse Effect. Each of the Company and the Subsidiaries has valid,
subsisting and enforceable leases for the properties described in the
Registration Statement and the Prospectus as leased by it, with such
exceptions as are described in the Registration Statement and Prospectus or
such as in the aggregate are not burdensome and do not interfere with the
use or proposed use of the property or the conduct of the business of the
Company or the Subsidiaries in a manner that is or would have a Material
Adverse Effect.
(ix) The Company has all requisite corporate power and authority to
enter into this Agreement and to carry out the provisions hereof, and to
issue and deliver the Company Shares to the Underwriters as provided
herein. This Agreement has been duly authorized, executed and delivered by
the Company and constitutes a legal, valid and binding agreement of the
Company, enforceable against it in accordance with the terms hereof, except
to the extent rights to indemnity hereunder may be limited by federal or
state securities laws or public policy underlying such laws and except to
the extent the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by equitable principles.
(x) The Company Shares have been duly and validly authorized for
issuance by the Company, and the Company has full corporate power and
authority to issue, sell and deliver the Company Shares; and, when such
Company Shares are issued and delivered against payment therefor as
provided by this Agreement, the Company Shares will have been validly
issued, fully paid and nonassessable, and the issuance of such Company
Shares will not be subject to any statutory preemptive rights or similar
statutory rights or any other preemptive or similar rights. All corporate
action required to be taken by the Company for the authorization, issuance
and sale of the Company Shares has been duly and validly taken.
(xi) Each of the Company and the Subsidiaries owns, or possesses
adequate rights to use, all patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, tradenames, copyrights and
other rights necessary for the conduct of its business as described in the
Registration Statement and the Prospectus, and neither the Company nor any
of the Subsidiaries has received a notice, or knows of any basis, of any
conflict with the asserted rights of others in any such respect that could
have a Material Adverse Effect.
(xii) Deloitte & Touche LLP are independent auditors with respect to
the Company and the Subsidiaries as required by the Act.
(xiii) The consolidated financial statements and related notes and
schedules included in the Registration Statement or in the Prospectus
present fairly the financial position of the Company and the Subsidiaries,
on the basis stated in the Registration Statement, as of the respective
dates thereof and the results of operations and cash flows of the Company
and the Subsidiaries, for the respective periods covered thereby; and such
financial statements and the related schedules and notes have been prepared
in conformity
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<PAGE>
with generally accepted accounting principles applied on a consistent basis
throughout the entire period involved, except as otherwise disclosed in the
Registration Statement and the Prospectus. The selected consolidated
financial data included in the Registration Statement or the Prospectus
presents fairly the information shown therein and has been compiled on a
basis consistent with that of the audited financial statements of the
Company included therein. No other financial statements or schedules of the
Company and the Subsidiaries are required to be included in the
Registration Statement or Prospectus.
(xiv) The Shares conform in all material respects to the descriptions
thereof in the Registration Statement and Prospectus.
(xv) Since the respective dates as of which information is provided
in the Registration Statement and Prospectus, except as otherwise
specifically stated therein, there has been no change or development with
respect to the condition (financial or otherwise) or business of the
Company and the Subsidiaries, taken as a whole, whether or not arising in
the ordinary course of business, that would have a Material Adverse Effect.
(xvi) Neither the Company nor any Subsidiary is in violation of its
certificate or articles of incorporation or bylaws or other organizational
documents. Neither the Company nor any Subsidiary is, nor with the passage
of time or the giving of notice or both would be, in violation of any law,
ordinance, administrative or governmental rule or regulation applicable to
the Company or any of the Subsidiaries, or of any judgment, order or decree
of any court or governmental agency or body or of any arbitrator having
jurisdiction over the Company or any of the Subsidiaries, or in default in
the performance or observance of any obligation, agreement, covenant or
condition contained in any mortgage, loan agreement, note, bond, debenture,
credit agreement or any other evidence of indebtedness or in any agreement,
contract, indenture, lease or other instrument to which the Company or any
of the Subsidiaries is a party or by which it may be bound, or to which any
of the property or assets of the Company or any of the Subsidiaries is
subject, the effect of which violation or default in performance or
observance would have a Material Adverse Effect.
(xvii) There is no action, suit or proceeding before or by any court,
arbitrator or governmental agency or body pending or, to the Company's
knowledge, threatened against the Company or any of the Subsidiaries or to
which any of their respective property is subject (A) that is required to
be described in the Registration Statement or the Prospectus but is not
described as required or (B) that, if adversely determined, could
reasonably be expected to have a Material Adverse Effect.
(xviii) No person has any right to the registration of any security
of the Company by reason of the filing of the Registration Statement with
the Commission or the consummation of the transactions contemplated hereby,
which right has not been waived or lapsed.
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<PAGE>
(xix) The Company is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(xx) As of the date of the Prospectus, neither the Company nor any
of the Subsidiaries is currently planning any acquisitions for which
disclosure of pro forma financial information would be required by the Act.
(xxi) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus (or any amendment or
supplement thereto), except as otherwise stated therein, (A) neither the
Company nor any of the Subsidiaries (1) has issued any securities other
than in connection with the exercise of any outstanding options, (2)
incurred any material liability or obligations, direct or contingent, for
borrowed money, (3) entered into any transaction, not in the ordinary
course of business, that is material to the Company and the Subsidiaries
taken as a whole, (4) entered into any transaction with an affiliate of the
Company (as the term "affiliate" is defined in Rule 405 of the Act
Regulations) which would otherwise be required to be disclosed in the
Prospectus or the Registration Statement, or (5) declared or paid any
dividend on its capital stock, or made any other distribution to its equity
holders other than such dividends and distributions from the Subsidiaries
to the Company or other Subsidiaries, (B) there has not been any material
change in the capital stock or other equity, or material increase in the
short-term or long-term debt, of the Company or any of the Subsidiaries and
(C) there has been no change or development with respect to the condition
(financial or otherwise) or business of the Company and the Subsidiaries,
taken as a whole, whether or not arising in the ordinary course of
business, that would have a Material Adverse Effect.
(xxii) The Company has not distributed and, prior to the later to
occur of (A) the Closing Date and (B) completion of the distribution of the
Shares, will not distribute without your prior written consent any offering
material in connection with the offering and sale of the Shares other than
the Registration Statement, the Prospectus or other materials, if any,
permitted by the Act.
(xxiii) The Common Stock has been approved for quotation on The
Nasdaq National Market subject to official notice of issuance.
(xxiv) Neither the Company nor any Subsidiary is involved in any
labor dispute and, to the knowledge of the Company, no such dispute is
threatened.
(xxv) Neither the Company nor any Subsidiary nor any employee or
agent of the Company or any Subsidiary has made any payment of funds of the
Company or any Subsidiary or received or retained any funds in violation of
any law, rule or regulation or of a character required to be disclosed in
the Prospectus.
(xxvi) The Company and each of the Subsidiaries have filed (or have
obtained extensions thereto) all federal, state, and foreign tax returns
that are required to be filed (other than returns with respect to which
failure to so file would not have a Material
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<PAGE>
Adverse Effect), which returns are complete and correct in all material
respects and have paid all taxes shown on such returns and all assessments
with respect thereto to the extent that the same have become due.
(xxvii) Except for the shares of capital stock of each of the
Subsidiaries that is a corporation, neither the Company nor any of the
Subsidiaries owns any shares of stock or any other securities of any
corporation or has any equity interest in any firm, partnership,
association or other entity other than as reflected in the consolidated
financial statements included in the Registration Statement and the
Prospectus.
(xxviii) Neither the execution, delivery or performance of this
Agreement, the offer, issuance, sale or delivery of the Company Shares nor
the consummation by the Company of the terms of this Agreement (A) requires
the consent, approval, authorization, registration or order of any court or
governmental agency or body, except the registration, to the extent
required, under the Act of the Shares, and such consents, approvals,
authorizations, registrations or orders as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters or by the National
Association of Securities Dealers, Inc. (the "NASD") and such other
approvals as have been obtained, (B) will conflict with, result in a breach
of, or constitute a default under the terms of any indenture, agreement,
lease or other instrument to which the Company or any of the Subsidiaries
is a party or by which any of them or any of their respective properties
may be bound, or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any of
the Subsidiaries pursuant to the terms of any agreement or instrument to
which any of them is a party or by which any of them may be bound or to
which any of the property or assets of any of them is subject, (C) will
conflict with or violate any law, order, statute, regulation, consent or
memorandum of understanding applicable to the Company or any Subsidiary of
any court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over the Company or any of the Subsidiaries
(in the case of (B) or (C) above, where such conflict, breach, default or
violation, individually or in the aggregate, would have a Material Adverse
Effect), or (D) the charter or by-laws of the Company or any Subsidiary.
(xxix) The Company has not taken, directly or indirectly, any action
designed to cause or result in or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of the Common Stock to facilitate the sale or
resale of the Shares.
(xxx) The Company is not required to comply with Section 526.075 of
the Florida statutes.
(xxxi) The acquisition by VTEK, Inc., a wholly-owned subsidiary of
the Company, of Sensory System Ltd and Teletec SARL on March 29, 1996 was
effectuated in accordance with applicable corporate and other laws, and
resulted in no liability to the Company, except as disclosed in the
Registration Statement and Prospectus.
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<PAGE>
(b) Any certificate signed by any officer of the Company delivered to the
Underwriters or to counsel for the Underwriters pursuant to the terms of this
Agreement shall be deemed a representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
----------------------------------------------------------
(a) Each Selling Shareholder, severally and not jointly, represents and
warrants to the Underwriters as of the Representation Date and as of the Closing
Date, as follows:
(i) Such Selling Shareholder has valid marketable title to the Shares
to be sold by such Selling Shareholder, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than
pursuant to this Agreement; and upon delivery of such Shares hereunder and
payment of the purchase price as herein contemplated, each of the
Underwriters will obtain valid marketable title to the Shares purchased by
it from such Selling Shareholder, free and clear of any pledge, lien,
security interest pertaining to such Selling Shareholder or such Selling
Shareholder's property, encumbrance, claim or equitable interest, including
any liability for estate or inheritance taxes, or any liability to or
claims of any creditor, devisee, legatee or beneficiary of such Selling
Shareholder.
(ii) Such Selling Shareholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing ___________________________ and______________________________ as
attorneys-in-fact (collectively, the "Attorneys" and individually, an
"Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody
Agreement") with _____________________________, as custodian (the
"Custodian"); each of the Power of Attorney and the Custody Agreement
constitutes a valid and binding agreement on the part of such Selling
Shareholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and each of
such Selling Shareholder's Attorneys, acting alone, is authorized to
execute and deliver this Agreement and the certificate referred to in
Section 6(h) hereof on behalf of such Selling Shareholder, to determine the
purchase price to be paid by the several Underwriters to such Selling
Shareholder as provided in Section 3 hereof, to authorize the delivery of
the Selling Shareholder Shares under this Agreement and to duly endorse (in
blank or otherwise) the certificate or certificates representing such
Shares or a stock power or powers with respect thereto, to accept payment
therefor, and otherwise to act on behalf of such Selling Shareholder in
connection with this Agreement.
(iii) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Shareholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on
behalf of such Selling Shareholder of this Agreement and the sale and
delivery of the Selling Shareholder Shares under this Agreement (other
than, at the time of the execution hereof (if the Registration Statement
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<PAGE>
has not yet been declared effective by the Commission), the issuance of the
order of the Commission declaring the Registration Statement effective and
such consents, approvals, authorizations or orders as may be necessary
under state or other securities or Blue Sky laws) have been obtained and
are in full force and effect; such Selling Shareholder, if other than a
natural person, has been duly organized and is validly existing in good
standing under the laws of the jurisdiction of its organization as the type
of entity that it purports to be; and such Selling Shareholder has full
legal right, power and authority to enter into and perform its obligations
under this Agreement and such Power of Attorney and Custody Agreement, and
to sell, assign, transfer and deliver the Shares to be sold by such Selling
Shareholder under this Agreement.
(iv) Such Selling Shareholder has executed a Lock-Up Agreement, a form
of which is attached hereto as Exhibit A, and such Selling Shareholder will
comply with the provisions of the Lock-Up Agreement.
(v) Certificates in negotiable form for all Shares to be sold by such
Selling Shareholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such Selling Shareholder, have been placed
in custody with the Custodian for the purpose of effecting delivery
hereunder.
(vi) This Agreement has been duly authorized by each Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Shareholder and is a valid and
binding agreement of such Selling Shareholder, enforceable in accordance
with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof maybe
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any bond, debenture, note or other evidence
of indebtedness, or under any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to
which such Selling Shareholder is a party or by which such Selling
Shareholder, or any Selling Shareholder Shares hereunder or any properties
of such Selling Shareholder may be bound, (ii) to the best of such Selling
Shareholder's knowledge, result in any violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction
over such Selling Shareholder or over the properties of such Selling
Shareholder, or (iii) if such Selling Shareholder is other than a natural
person, result in any violation of any provisions of the charter, bylaws or
other organizational documents of such Selling Shareholder.
(vii) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected
to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
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<PAGE>
(viii) Such Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(ix) All information furnished by or on behalf of such Selling
Shareholder relating to such Selling Shareholder and the Selling
Shareholder Shares that is contained in the representations and warranties
of such Selling Shareholder in such Selling Shareholder's Power of Attorney
or set forth in the Registration Statement or the Prospectus is, and at the
time the Registration Statement became or becomes, as the case may be,
effective and all times subsequent thereto up to and on the Closing, was or
will be, true, correct and complete, and does not, and will not, and at the
time the Registration Statement became or becomes, as the case may be,
effective and all times subsequent thereto up to and on the Closing,
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make such information
not misleading.
(x) Such Selling Shareholder has reviewed the Prospectus and has
complied with all agreements and satisfied all conditions on its part to be
complied with or satisfied pursuant to this Agreement and has advised one
of its Attorneys and Jefferies & Company, Inc. if any statement to be made
on behalf of such Selling Shareholder in the certificate contemplated by
Section 6(h) is inaccurate.
(xi) Such Selling Shareholder does not have, or has waived, any
preemptive right, co-sale right or right of first refusal or other similar
right to purchase any of the Shares that are to be sold by the Company or
any of the other Selling Shareholders to the Underwriters pursuant to this
Agreement; such Selling Shareholder does not have, or has waived, any
registration right or other similar right to participate in the offering
made by the Prospectus, other than such rights of participation as have
been satisfied by the participation of such Selling Shareholder in the
transactions to which this Agreement relates in accordance with the terms
of this Agreement; and such Selling Shareholder does not own any warrants,
options or similar rights to acquire, and does not have any right or
arrangement to acquire, any capital stock, rights, warrants, options or
other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
(xii) Each of Canon, Inc. and John G. Linvill represents and warrants
that it is not aware that any of the representations and warranties of the
Company set forth in Section 1(a) above is untrue or inaccurate in any
material respect.
SECTION 3. SALE AND DELIVERY TO THE UNDERWRITERS: CLOSING.
----------------------------------------------
(a) Subject to the terms and conditions set forth herein, the Company and
the Selling Shareholders agree, severally and not jointly, to sell to each
Underwriter, severally and not jointly, and, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, each Underwriter, severally and not jointly, agrees to purchase from
the Company and the Selling Shareholders, at a purchase price of $_____ per
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share (the "Initial Price"), the aggregate number of Firm Shares set forth in
Schedule I hereto opposite the name of such Underwriter. The Company and the
Selling Shareholders will have no obligation to sell the Underwriters any of the
Firm Shares hereunder unless the Underwriters purchase all of the Firm Shares
hereunder.
(b) The Company grants to the Underwriters an option to purchase all or any
part of the Option Shares at the Initial Price. Option Shares shall be
purchased from the Company, severally and not jointly, for the accounts of the
Underwriters in proportion to the number of Firm Shares set forth in Schedule I
hereto opposite the name of such Underwriter. Such option may be exercised only
to cover over-allotments in the sale of the Firm Shares by the Underwriters and
may be exercised in whole or in part at any time on or before 12:00 noon, San
Francisco time, on the business day before the Firm Shares Closing Date (as
hereinafter defined), and only once thereafter within 30 days after the date of
the Prospectus, in each case upon written or telegraphic notice, or verbal or
telephonic notice confirmed by written or facsimile notice, by the Underwriters
to the Company no later than 12:00 noon, San Francisco time, on the business day
before the Firm Shares Closing Date or at least two business days before the
Option Shares Closing Date (as hereinafter defined), as the case may be, setting
forth the number of Option Shares to be purchased and the time and date (if
other than the Firm Shares Closing Date) of such purchase.
(c) Payment of the purchase prices for, and delivery of, the Firm Shares to
be purchased by the Underwriters shall be made at the offices of Jefferies &
Company, Inc., 39 Broadway, New York, New York 10006, or at such other place as
shall be agreed upon by the Underwriters and the Company at 7:00 A.M., San
Francisco time, on the fourth business day following the date the Registration
Statement becomes effective (or, if the Company elected to rely upon Rule 430A,
the fourth business day after the date of execution of this Agreement), or such
other time not later than ten business days after such date as shall be agreed
upon by the Underwriters and the Company (such time and date of payment and
delivery being herein called the "Firm Shares Closing Date"). Payment shall be
made to the Company and the Selling Shareholders by certified or official bank
check or checks drawn in New York Clearing House funds (next day funds) payable
to the order of the Company and the Selling Shareholders against delivery to the
Underwriters of the Firm Shares.
(d) Payment of the purchase price for, and delivery of, the Option Shares
to be purchased by the Underwriters shall be made at the office as set forth
above or at such other place as shall be agreed upon by the Underwriters and the
Company at the time and on the date (which may be the same as, but in no event
shall be earlier than, the Firm Shares Closing Date) specified in the notice
referred to in Section 3(b) (such time and date of delivery and payment are
called the "Option Shares Closing Date"). The Firm Shares Closing Date and the
Option Shares Closing Date are called, individually, the "Closing Date" and
together, the "Closing Dates." Payment shall be made to the Company by certified
or official bank check or checks drawn in New York Clearing House funds (next
day funds) payable to the order of the Company against delivery to the
Underwriters of the Option Shares.
(e) Certificates representing the Shares shall be in such denominations and
registered in such names as the Underwriters may request in writing at least two
business days before the
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Firm Shares Closing Date or, in the case of Option Shares, on the day of notice
of exercise of the option as described in Section 3(b). Such certificates will
be made available for examination and packaging by the Underwriters not later
than 10:00 A.M. on the last business day prior to the Firm Shares Closing Date
(or the Option Shares Closing Date in the case of the Option Shares) at the
office of the Company's registrar.
SECTION 4. COVENANTS OF THE COMPANY.
------------------------
The Company covenants with each of the Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Representation Date, and any amendment
thereof, to become effective, as promptly as possible after the filing thereof.
The Company will not file any amendment to the Registration Statement or any
amendment or supplement to the Prospectus to which the Underwriters shall
reasonably object in writing after a reasonable opportunity to review such
amendment or supplement. Subject to the foregoing sentences in this clause (a),
if the Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus or supplement to the Prospectus is otherwise
required under Rule 424(b), the Company will cause the Prospectus, properly
completed, or such supplement thereto to be filed with the Commission pursuant
to the applicable paragraph of Rule 424(b) within the time period prescribed and
will provide evidence satisfactory to the Underwriters of such timely filing.
The Company will promptly advise the Underwriters (i) when the Registration
Statement, if not effective at the Representation Date, and any amendment
thereto, shall have become effective, (ii) when the Prospectus, and any
supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b), (iii) when any amendment to the Registration Statement
shall have been filed or become effective, (iv) of any request by the Commission
for any amendment of the Registration Statement or supplement to any Prospectus
or for any additional information, (v) of the receipt by the Company of any
notification of, or if the Company otherwise has knowledge of, the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding for
that purpose and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of any
such stop order and, if issued, to obtain as soon as possible the lifting
thereof.
(b) If, at any time when a prospectus relating to the Shares is required to
be delivered under the Act or the Act Regulations, any event occurs as a result
of which the Prospectus as then amended or supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made not misleading, or if it shall be necessary to amend the Registration
Statement or amend or supplement the Prospectus to comply with the Act or the
Act Regulations, the Company promptly will prepare and file with the Commission,
subject to the second sentence of paragraph (a) of this Section 4, an amendment
or supplement which will correct such statement or omission or effect such
compliance. Neither your consent to, nor your delivery of, any such amendment
or supplement shall constitute a waiver of any of the conditions set forth in
Section 6.
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(c) The Company consents to the use of the Prospectus in accordance with
the provisions of the Act and with the securities or blue sky laws of the
jurisdictions in which the Shares are offered by the Underwriters and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the Act to be delivered in connection with the sales by any
Underwriter or dealer. The Company will comply with all requirements imposed
upon it by the Act, as now and hereafter amended, so far as necessary to permit
the continuance of sales of or dealing in the Shares in accordance with the
provisions hereof and the Prospectus.
(d) As soon as practicable, the Company will make generally available to
its securityholders and to the Underwriters a consolidated earnings statement or
statements of the Company and the Subsidiaries covering a twelve-month period
beginning after the Effective Date which will satisfy the provisions of Section
11(a) of the Act and Rule 158 under the Act Regulations.
(e) The Company will furnish to the Representatives, without charge, three
signed copies of the Registration Statement (including exhibits thereto and all
documents incorporated by reference therein) and, so long as delivery of a
prospectus by an Underwriter or dealer is required by the Act or the Act
Regulations, as many copies of the Prospectus and all amendments and supplements
thereto as the Underwriters may reasonably request.
(f) During the period of five years hereafter, the Company will furnish to
you, as soon as possible, a copy of its annual report to shareholders for such
year and (ii) a copy of each report or definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or mailed to shareholders.
(g) The Company will cause each of its executive officers and directors and
each beneficial owner of 6,250 shares or more of the Company's Common Stock to
enter into Lock-Up Agreements with the Underwriters in the form set forth in
Exhibit A hereto. The Company will not for a period of 180 days following the
date of the Prospectus, without prior written consent of Representatives, offer
to sell, contract to sell, or otherwise sell, dispose of, directly or
indirectly, with respect to any share of Common Stock or any securities
convertible into, or exchangeable for, Common Stock (other than (i) pursuant to
any employee stock option or incentive plan of the Company in effect at the
Representation Date or upon exercise of any other options outstanding at the
Representation Date or (ii) the sale of the Company Shares and Option Shares
hereunder.
(h) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(i) The Company will not at any time, directly or indirectly, take any
action intended, or which might reasonably be expected, to cause or result in,
or which will cause, stabilization of the price of the Common Stock to
facilitate the sale or resale of any of the Shares.
(j) The Company will apply the net proceeds from the offering and sale of
the Shares in accordance with the description set forth in the "Use of Proceeds"
section of the Prospectus
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and shall file such reports with the Commission with respect to the sale of the
Shares and the application of the proceeds therefrom as may be required by Rule
463 under the Act. The Company shall provide you a draft of each such report
prior to its filing for your approval, and shall furnish you with a signed copy
of each such report.
(k) The Company will cooperate with the Underwriters and their counsel in
connection with endeavoring to obtain and maintain the qualification or
registration, or exemption from qualification, of the Shares for offer and sale
under the applicable securities laws of such states and other jurisdictions of
the United States or the Underwriters may designate; provided that in no event
shall the Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action which would subject it to
taxation or general service of process in any jurisdiction where it is not now
so subject.
(l) The Company will cause the Common Stock to be (i) duly listed on The
Nasdaq National Market and (ii) registered under the Exchange Act.
SECTION 5. PAYMENT OF EXPENSES.
-------------------
The Company will pay, or reimburse if paid by the Underwriters, all costs
and expenses incident to the performance of the obligations of the Company under
this Agreement, including (i) the fees, disbursements and expenses of counsel
and accountants for the Company and all other expenses in connection with the
preparation, printing and filing of the Registration Statement, any Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, and the
mailing and delivery of copies thereof to the Underwriters and dealers, (ii) the
cost of printing the Agreement Among Underwriters, this Agreement, the Selling
Agreement, any Dealer Agreements, the Underwriters' Questionnaire, and the Blue
Sky Memorandum (in both preliminary and final form); (iii) all expenses in
connection with qualification of the Shares, for offering and sale under state
securities laws, including filing and registration fees and the reasonable fees,
disbursements and expenses of counsel for the Underwriters in connection with
such qualification and in connection with Blue Sky surveys; (iv) the filing fees
incident to securing any required review by the NASD; (v) the cost of preparing
stock certificates; (vi) all fees of the Company's transfer agent and registrar;
(vii) any fees for including the Shares on The Nasdaq National Market; and
(viii) all other costs and expenses incident to the performance of the
obligations of the Company and the Selling Shareholders hereunder which are not
otherwise specifically provided for in this Section. Any additional expenses
incurred as a result of the sale of the Shares by the Selling Shareholders will
be borne collectively by the Company and the Selling Shareholders. The
provisions of this Section 5 are intended to relieve the Underwriters from the
payment of the expenses and costs which the Selling Shareholders and the Company
hereby agree to pay, but shall not affect any agreement which the Selling
Shareholders and the Company may make, or may have made, for the sharing of any
of such expenses and costs. Such agreements shall not impair the obligations of
the Company and the Selling Shareholders hereunder to the several Underwriters.
If this Agreement is terminated by the Underwriters because of any failure
or refusal on the part of the Company or the Selling Shareholders to comply with
the terms or fulfill any of the conditions of this Agreement, the Company shall
reimburse the Underwriters for all of their
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reasonable out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriters.
SECTION 6. CONDITIONS OF THE UNDERWRITERS' OBLIGATION.
------------------------------------------
The obligation of the Underwriters to purchase the Shares hereunder is
subject to the continued accuracy of the representations and warranties of the
Company and the Selling Shareholders herein contained, to the accuracy of the
statements of the Company and the Selling Shareholders made in any certificates
pursuant to the provisions hereof, to the performance by the Company and the
Selling Shareholders of its obligations hereunder, and to the following further
conditions:
(a) The Registration Statement shall have become effective, and you shall
have received notice thereof, not later than 5:30 p.m., Washington, D.C. time,
on the date hereof, or such later time and date as shall be approved by the
Representatives and the Company and shall remain effective at the Closing Date.
No stop order suspending the effectiveness of the Registration Statement shall
have been issued under the Act or proceedings therefor initiated or threatened
by the Commission. No order suspending the effectiveness of the Registration
Statement or the qualification or registration of the Shares under the
securities or blue sky laws of any jurisdiction shall be in effect or
proceedings therefor initiated or threatened by the Commission or the
authorities of any such jurisdiction. If the Company has elected to rely upon
Rule 430A, the price of the Shares and any price-related or other information
previously omitted from the effective Registration Statement pursuant to Rule
430A shall have been transmitted to the Commission for filing pursuant to Rule
424(b) within the prescribed time period, and prior to the Closing Date, the
Company shall have provided evidence satisfactory to the Underwriters of such
timely filing, or a post-effective amendment providing such information shall
have been promptly filed and declared effective in accordance with the
requirement of Rule 430A.
(b) Subsequent to the execution and delivery of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting particularly the business, properties, condition
(financial or other) or results of operations of the Company or the
Subsidiaries, taken as a whole, which, in the judgment of the Underwriters,
materially impairs the investment quality of the Shares; (ii) any material loss
or interference with the business or properties of the Company or any of the
Subsidiaries from fire, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or any court or legislative or
other governmental action, order or decree, which is not set forth in the
Registration Statement and the Prospectus, if in the judgment of the
Underwriters any such development makes it impracticable or inadvisable to
proceed with completion of the sale of and payment for the Shares; (iii) any
suspension or limitation of trading in securities generally on the New York
Stock Exchange or The Nasdaq National Market, or any setting of minimum prices
for trading on such exchange or system, or any suspension of trading of any
securities of the Company on any exchange or in the over-the-counter market;
(iv) any banking moratorium declared by federal or New York authorities; or (v)
any outbreak or escalation of major hostilities in which the United States is
involved, any declaration of war by Congress or any other substantial national
or international calamity or emergency if, in the reasonable judgment of the
Underwriters, the effect of any such outbreak, escalation, declaration, calamity
or emergency
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<PAGE>
makes it impractical or inadvisable to proceed with completion of the sale of
and payment for the Shares.
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or any of the Subsidiaries or
any of their respective officers or directors in their capacities as such,
before or by any federal, state or local court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, or
arbitrator, in which litigation or proceeding an unfavorable ruling, decision or
finding would have a Material Adverse Effect.
(d) Each of the representations and warranties of the Company and the
Selling Shareholders contained herein shall be true and correct in all material
respects at the Closing Date, as if made at the Closing Date, and all covenants
and agreements contained herein to be performed on the part of the Company and
the Selling Shareholders and all conditions contained herein to be fulfilled or
complied with by the Company and the Selling Shareholders at or prior to the
Closing Date, shall have been duly performed, fulfilled or complied with.
(e) You shall have received an opinion from Wilson, Sonsini, Goodrich &
Rosati, counsel for the Company and the Selling Shareholders, satisfactory in
form and substance to counsel for the Underwriters, dated as of each Closing
Date, to the effect set forth in Exhibit B.
(f) You shall have received the favorable opinion, dated as of each Closing
Date, of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, with
respect to such matters as may be reasonably requested by the Underwriters.
(g) The following conditions contained in clauses (i), (ii) and (iii) of
this Section 6(g) shall have been satisfied on and as of each Closing Date and
the Company shall have furnished to the Underwriters a certificate of the
Company, signed by the President and the principal financial or accounting
officer of the Company, dated such Closing Date to the effect that the signers
of such certificate have carefully examined the Registration Statement, the
Prospectus, any supplement or amendment to the Prospectus, and this Agreement
and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and the
Company has complied with all the agreements and satisfied all the
conditions under this Agreement on its part to be performed or satisfied at
or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, threatened; and
(iii) when the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information
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required to be included therein by the Act and the Rules and Regulations
and in all material respects conformed to the requirements of the Act and
the Rules and Regulations, the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does not
include any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has
not been so set forth; and
(iv) since the date of the most recent financial statements included
in the Prospectus, there has been no change that could have a Material
Adverse Effect.
(h) You shall be satisfied that, and you shall have received a certificate,
dated as of each Closing Date from the Attorneys for each Selling Shareholder to
the effect that, as of each Closing Date, they have not been informed that:
(i) the representations and warranties made by such Selling
Shareholder herein are not true or correct in any material respect on each
Closing Date; or
(ii) such Selling Shareholder has not complied with any obligation or
satisfied any condition which is required to be performed or satisfied on
the part of such Selling Shareholder at or prior to each Closing Date.
(i) At the Representation Date and at each Closing Date, Deloitte & Touche
LLP shall have furnished to the Underwriters a letter or letters, dated
respectively as of the date of this Agreement and each Closing Date, in form and
substance satisfactory to the Underwriters, containing statements and
information of the type customarily included in accountants' "comfort letters"
to underwriters with respect to the financial statements and certain financial
and statistical information pertaining to the Company and the Subsidiaries
contained in the Registration Statement and the Prospectus.
(j) At the Representation Date, the Company shall have furnished to the
Underwriters a Lock-Up Agreement substantially in the form of Exhibit A hereto
from each executive officer, director and shareholder of the Company
beneficially owning 6,250 or more shares of the Company's Common Stock of the
Company addressed to the Underwriters, in which each such person or entity
agrees not to offer, sell or contract to sell, or otherwise dispose of, directly
or indirectly, or announce an offering of, any shares of Common Stock
beneficially owned by such person or entity or any securities convertible into,
or exchangeable for, shares of Stock for a period of 180 days following the date
of the Prospectus without the prior written consent of the Representatives,
other than shares of Common Stock disposed of as bona fide gifts.
(k) At the Closing Date, counsel for the Underwriters shall have been
furnished with such information, certificates and documents as they may
reasonably require for the purpose of enabling them to pass upon the issuance
and sale of the Shares as contemplated herein and related
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<PAGE>
proceedings, or in order to evidence the accuracy of any of the representations
or warranties, or the fulfillment of any of the conditions, herein contained, or
otherwise in connection with the offering contemplated hereby; and all opinions
and certificates mentioned above or elsewhere in this Agreement shall be
reasonably satisfactory in form and substance to the Underwriters and counsel
for the Underwriters.
If any condition specified in this Section 6 shall not have been fulfilled
in all material respects when and as required to be fulfilled, this Agreement
may be terminated by the Underwriters by notice to the Company and such
termination shall be without liability of any party to any other party except as
provided in Section 5.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
--------------------------------
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter and its respective officers, shareholders, employees and directors
and any person who controls any Underwriter within the meaning of Section 15 of
the Act from and against any loss, expense, liability or claim (including the
reasonable cost of investigating such claim) which, jointly or severally, any
such Underwriter or any such officer, shareholder, employee, director or
controlling person may incur under the Act, the Exchange Act or otherwise, as
such expenses are incurred, insofar as such loss, expense, liability or claim
arises out of or is based upon any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement (or in the
Registration Statement as amended by any post-effective amendment thereof) or
any omission or alleged omission to state a material fact required to be stated
in such Registration Statement or necessary to make the statements made therein
not misleading or any untrue statement or alleged untrue statement of a material
fact contained in a Prospectus (the term Prospectus for the purpose of this
Section 7 being deemed to include any Preliminary Prospectus, the Prospectus,
the Prospectus as amended or supplemented and any document filed under the
Exchange Act and incorporated by reference into the Prospectus) or any omission
or alleged omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, the Company will not be
liable in any such case to the extent any such loss, expense, liability or claim
arises out of or is based upon any untrue statement or omission or alleged
untrue statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information provided in writing to the
Company by or on behalf of any Underwriter, expressly for use in the
Registration Statement or the Prospectus; and provided, further that with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any Preliminary Prospectus the indemnity agreement contained in
this Section 7(a) shall not inure to the benefit of any such indemnified
Underwriter or its officers, shareholders, employees, directors or controlling
persons, and the Company shall not be liable to any such indemnified Underwriter
or its officers, shareholders, employees, directors or controlling persons, from
whom the person asserting any such losses, claims, damage, or liabilities
purchased the Shares concerned, to the extent that any such loss, claim, damage
or liability of such indemnified Underwriter or its officers, shareholders,
employees, directors or controlling persons, results from the fact that there
was not sent or given to such person at or prior to the written confirmation of
the sale of such shares to such person, a copy of the Prospectus, as the same
may be amended or supplemented, and the untrue statement or alleged
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untrue statement of a material fact or omission or alleged omission to state a
material fact in such Preliminary Prospectus was corrected in such Prospectus
and the Company had previously furnished copies thereof to such indemnified
Underwriter on a timely basis in order to permit the Prospectus (as the same may
be amended or supplemented) to be sent or given. The Company agrees that the
only such information provided in writing by or on behalf of any Underwriter,
expressly for use in the Registration Statement or the Prospectus, is that
information contained in the table and the second paragraph following the table
in the section of the Prospectus entitled "Underwriting." The foregoing
indemnity agreement shall be in addition to any liability which the Company may
otherwise have.
(b) Each Selling Shareholder, severally and not jointly agrees to
indemnify, defend and hold harmless each Underwriter and its respective
officers, shareholders, employees and directors and any person who controls any
Underwriter within the meaning of Section 15 of the Act from and against any
loss, expense, liability or claim (including the reasonable cost of
investigating such claim) which, jointly or severally, any such Underwriter or
any such officer, shareholder, employee, director or controlling person may
incur under the Act, the Exchange Act or otherwise, as such expenses are
incurred, insofar as such loss, expense, liability or claim arises out of or is
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof) or any omission or alleged
omission to state a material fact required to be stated in such Registration
Statement or necessary to make the statements made therein not misleading or any
untrue statement or alleged untrue statement of a material fact contained in a
Prospectus (the term Prospectus for the purpose of this Section 7 being deemed
to include any Preliminary Prospectus, the Prospectus, the Prospectus as amended
or supplemented and any document filed under the Exchange Act and incorporated
by reference into the Prospectus) or any omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, the Selling Shareholders, excluding Canon,
Inc. and John G. Linvill, will only be liable insofar as any such loss, expense,
liability or claim arises out of or is based upon any untrue statement or
omission or alleged untrue statement or omission made in reliance or in
conformity with information relating to such Selling Shareholder and the Selling
Shareholder shares furnished in writing to the Company by or on behalf of such
Selling Shareholder, expressly for use in the Registration Statement or the
Prospectus; provided, further, the Selling Shareholders will not be liable in
any such case to the extent any such loss, expense, liability or claim arises
out of or is based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information provided in writing to the
Company by or on behalf of any Underwriter, expressly for use in the
Registration Statement or the Prospectus; and provided, further that with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any Preliminary Prospectus the indemnity agreement contained in
this Section 7(b) shall not inure to the benefit of any such indemnified
Underwriter or its officers, shareholders, employees, directors or controlling
persons, and the Selling Shareholders shall not be liable to any such
indemnified Underwriter or its officers, shareholders, employees, directors or
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controlling persons, from whom the person asserting any such losses, claims,
damage, or liabilities purchased the Shares concerned, to the extent that any
such loss, claim, damage or liability of such indemnified Underwriter or its
officers, shareholders, employees, directors or controlling persons, results
from the fact that there was not sent or given to such person at or prior to the
written confirmation of the sale of such shares to such person, a copy of the
Prospectus, as the same may be amended or supplemented, and the untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact in such Preliminary Prospectus was corrected in such
Prospectus and the Company had previously furnished copies thereof to such
indemnified Underwriter on a timely basis in order to permit the Prospectus (as
the same may be amended or supplemented) to be sent or given. The Selling
Shareholders agree that the only such information provided in writing by or on
behalf of any Underwriter, expressly for use in the Registration Statement or
the Prospectus, is that information contained in the table and the second
paragraph following the table in the section of the Prospectus entitled
"Underwriting." The foregoing indemnity agreement shall be in addition to any
liability which the Selling Shareholders may otherwise have.
(c) Each Underwriter agrees to indemnify, defend and hold harmless the
Company and each Selling Shareholder and their officers, shareholders, employees
and directors and any person who controls the Company or the Selling Shareholder
within the meaning of Section 15 of the Act from and against any loss, expense,
liability or claim (including the reasonable cost of investigating such claim)
which the Company or Selling Shareholder or any such officer, shareholder,
employee, director or controlling person may incur under the Act, the Exchange
Act or otherwise to the same extent as the provisions of Sections 7(a) and 7(b)
above, but only insofar as such loss, expense, liability or claim arises out of
or is based upon any untrue statement or omission or alleged untrue statement or
omission made in reliance or in conformity with information relating to such
Underwriter furnished in writing to the Company by or on behalf of such
Underwriter, expressly for use in the Registration Statement or the Prospectus.
The Company and the Selling Shareholders agree that the only information
provided in writing by or on behalf of the Underwriters to the Company for use
in the Registration Statement or the Prospectus, is that information contained
in the table and the second paragraph following the table in the section of the
Prospectus entitled "Underwriting."
(d) If any action is brought against an indemnified party under this
Section 7, the indemnified party or parties shall promptly notify the
indemnifying party in writing of the institution of such action (provided that
the failure to give such notice shall not relieve the indemnifying party of any
liability that it may have pursuant to this Agreement, unless and to the extent
the indemnifying party did not otherwise learn of such action and such failure
has resulted in the forfeiture of substantive rights or defenses by the
indemnifying party) and the indemnifying party shall assume the defense of such
action, including the employment of counsel and payment of reasonable expenses.
The indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of the indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying party in
connection with the defense of such action, (ii) the indemnifying party shall
not have employed counsel reasonably satisfactory to the indemnified party to
take charge of the defense of such action within a reasonable time after notice
of the institution of such action, (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
that are different from or additional to those available to the indemnifying
party or (iv) the use of counsel chosen by the indemnifying party to represent
the indemnified party would present such counsel with a conflict
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of interest (in which case the indemnifying party shall not have the right to
direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying party and paid as incurred; provided that the indemnifying party
shall only be responsible for the fees and expenses of one counsel for the
indemnified party or parties hereunder. Anything in this paragraph to the
contrary notwithstanding, the indemnifying party shall not be liable for any
settlement of any such claim or action effected without its written consent
which shall not be unreasonably withheld.
(e) If the indemnification provided for in this Section 7 is unavailable to
an indemnified party under subsection (a), (b) or (c) of this Section 7 in
respect of any losses, damages, expenses, liabilities or claims referred to
therein, then each applicable indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, expenses,
liabilities or claims (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company or the Selling Shareholder on the one
hand and the Underwriters on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company or the Selling Shareholder on the one hand and the Underwriters on
the other hand in connection with the statements or omissions which resulted in
such losses, expenses, liabilities or claims, as well as any other relevant
equitable considerations. The relative benefits received by the Company or the
Selling Shareholder on the one hand and the Underwriters on the other hand shall
be deemed to be in the same proportion as the total proceeds from the offering
(net of underwriting discounts and commissions but before deducting expenses)
received by the Company or the Selling Shareholder bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault of the Company or the Selling Shareholder on the one hand and of
the Underwriters on the other hand shall be determined by reference to, among
other things, whether the untrue statement or alleged untrue statement of a
material fact or omission or alleged omission relates to information supplied by
the Company or the Selling Shareholder or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, expenses, liabilities and claims referred to above shall
be deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any claim or action.
(f) The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in Section
7(e) above. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the underwriting
discount received by it and no Selling Shareholder shall be required to
contribute any amount in excess of the net proceeds of the offering received by
it. No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
SECTION 8. DEFAULT OF UNDERWRITERS.
-----------------------
-22-
<PAGE>
If any Underwriter or Underwriters default in their obligations to purchase
Shares hereunder on either the Firm Shares Closing Date or the Option Shares
Purchase Date and the aggregate number of Shares that such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of
the total number of Shares that the Underwriters are obligated to purchase on
such Closing Date, the Representatives may make arrangements satisfactory to the
Company and Selling Shareholders for the purchase of such Shares by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Shares that such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of Shares with respect to which such default or defaults occur
exceeds 10% of the total number of Shares that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to the
Representatives and the Company for the purchase of such Shares by other persons
are not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter, the Company or
Selling Shareholders, except as provided in Sections 5 and 7 (provided that if
such default occurs with respect to the Option Shares after the Firm Shares
Closing Date, this Agreement will not terminate as to the Firm Shares). As used
in this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
--------------------------------------------------------------
The respective indemnity and contribution agreements contained in Section 7
and the covenants, representations and warranties of the Company and Selling
Shareholders contained in this Agreement or contained in certificates of
officers of the Company and the certificate of the Selling Shareholders
submitted pursuant hereto, shall remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter or any of its respective officers, employees, directors,
shareholders or person who controls any Underwriter, or by or on behalf of the
Company or any of the officers or directors or any controlling person of the
Company, or by or on behalf of the Selling Shareholders, and will survive
delivery of and payment for the Shares.
SECTION 10. NOTICES.
-------
All notices and other communications hereunder will be in writing and shall
be deemed to have been duly given if mailed or transmitted by standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Underwriters in care of Jefferies & Company, Inc. at 11100 Santa Monica
Boulevard, Los Angeles, California 90071, attn: Jerry Gluck, Esq.; or, if sent
to the Company or the Selling Shareholders, directed to Telesensory Corporation,
455 North Bernardo, Mountain View, CA 94043, attention: Larry Israel, with a
copy to Sandy Rozynko, Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road,
Palo Alto, CA 94304.
SECTION 11. PARTIES.
-------
-23-
<PAGE>
This Agreement shall inure to the benefit of and be binding upon the
Underwriters, the Company, the Selling Shareholders and their respective
successors, and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to provide any person, firm or
corporation, other than the Underwriters, the Company, the Selling Shareholders
and their respective successors and legal representatives and the controlling
persons and officers, employees, directors and shareholders referred to in
Sections 7 and 8 and their respective heirs and legal representatives, any legal
or equitable right, remedy or claim under or in respect of this Agreement or any
provision herein or therein contained. This Agreement and all conditions and
provisions hereof are intended to be for the sole and exclusive benefit of the
Underwriters, the Company, the Selling Shareholders and their respective
successors and legal representatives, and said controlling persons,
shareholders, officers and directors and their respective heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Shares from any Underwriter shall be deemed to be a successor by
reason merely of such purchase.
SECTION 12. GOVERNING LAW AND TIME.
----------------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to agreements made and to be
performed in said State. Specified times of day refer to California time,
unless otherwise specified.
SECTION 13. COUNTERPARTS.
------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
-24-
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement among
the Company, the Selling Shareholders and the Underwriters in accordance with
its terms.
Very truly yours,
TELESENSORY CORPORATION
By:_________________________
Larry Israel, President
SELLING SHAREHOLDERS
By:___________________________________________
_________________, Attorney-In-Fact for the
Selling Shareholders Named in Schedule II
hereto
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
JEFFERIES & COMPANY, INC.
VAN KASPER & COMPANY
As Representatives of
the Several Underwriters
By: Jefferies & Company, Inc.
By:__________________________
Name:________________________
Title:_______________________
-25-
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of
Firm Shares
Name of Underwriter to be Purchased
------------------- ---------------
Jefferies & Company, Inc.........
Van Kasper & Company.............
---------
Total........................ 2,900,000
=========
-26-
<PAGE>
SCHEDULE II
Number of
Company Shares
to be Sold
----------------
Telesensory Corporation............ 2,275,000
Total......................... 2,275,000
=========
<TABLE>
<CAPTION>
Number of
Selling Shareholder
Name of Selling Shareholder Shares to be Sold
--------------------------- -----------------
<S> <C>
Canon, Inc................................. 416,662
John G. Linvill............................ 75,000
(Other Selling Shareholders)............... 133,338
-------
Total................................. 625,000
=======
</TABLE>
-27-
<PAGE>
SCHEDULE III
SUBSIDIARIES
<TABLE>
<CAPTION>
Telesensory
Name Jurisdiction Ownership (%)
---- ------------ -------------
<S> <C> <C>
VTEK, Inc. Nevada corporation 100%
Telesensory Foreign Sales Corporation ____corporation 100%
Sensory Systems Ltd. English corporation 100% *
Teletec SARL French corporation 100% *
</TABLE>
____________________________________
*Wholly-owned subsidiary of VTEK.
-28-
<PAGE>
EXHIBIT A
TELESENSORY CORPORATION
LOCK-UP AGREEMENT
Telesensory Corporation
Jefferies & Company, Inc.
Van Kasper & Company
c/o Jefferies & Company, Inc.
11100 Santa Monica Boulevard
Los Angeles, CA 90025
Ladies and Gentlemen:
The undersigned understands that Jefferies & Company, Inc. and Van
Kasper & Company, as the representatives (the "Representatives") of the several
underwriters (the "Underwriters"), propose to enter into an underwriting
agreement (the "Underwriting Agreement") with Telesensory Corporation (the
"Company") providing for the public offering (the "Public Offering") by the
Underwriters of Common Stock of the Company (the "Common Stock") pursuant to the
Company's Registration Statement to be filed with the Securities and Exchange
Commission on or about July 26, 1996 (the "Registration Statement").
In consideration of the Underwriters' agreement to purchase and
undertake the Public Offering of the Company's Common Stock, and for other good
and valuable consideration, receipt of which is hereby acknowledged, the
undersigned agrees that, without the prior written consent of Jefferies &
Company, Inc., the undersigned will not offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights (collectively, a
"Disposition") with respect to any share of Common Stock or any securities
convertible into or exchangeable for Common Stock of the Company (including,
without limitation, Common Stock of the Company that may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations of the Securities and Exchange Commission and Common Stock that may
be issued upon exercise of a stock option or warrant) (collectively, the
"Securities") now beneficially owned or hereafter beneficially acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, for a period of 180 days after the date of the final
Prospectus (the "Lock-Up Period"); provided, however, that a bona fide gift or
gifts to a donee or donees or a distribution to limited partners or shareholders
of the undersigned shall not be considered a Disposition, provided that the
donee, donees or distributees thereof agree in writing to be bound by this Lock-
Up Agreement.
The foregoing restriction is expressly agreed to preclude the holder
of the Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of the
Securities during the Lock-Up Period even
-29-
<PAGE>
if such Securities would be disposed of by someone other than the undersigned.
Such prohibited hedging or other transactions would include without limitation
any short sale or any purchase, sale or grant of any right (including without
limitation any put or call option) with respect to any of the Securities or with
respect to any security that includes, relates to or derives any significant
part of its value from the Securities.
Furthermore, the undersigned hereby agrees and consents to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by the undersigned except in compliance with
this Lock-Up Agreement.
The undersigned understands that the Company and the Underwriters will
proceed with the Public Offering in reliance on this Lock-Up Agreement.
Very truly yours,
Effective: ___________, 1996 ________________________________________________
(Signature)
________________________________________________
(Print Name)
________________________________________________
(Title)
Address: ________________________________________________
________________________________________________
________________________________________________
-30-
<PAGE>
EXHIBIT B
(i) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
California, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus;
(ii) each Subsidiary that is a corporation has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has full corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and the Prospectus;
(iii) each of the Company and the Subsidiaries is duly registered and
qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature or location of its properties (owned
or leased) or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not
have a Material Adverse Effect;
(iv) all the outstanding shares of capital stock of each Subsidiary
that is a corporation have been duly authorized and validly issued and are
fully paid and nonassessable, and, except as otherwise set forth in the
Prospectus, all outstanding shares of capital stock of each such Subsidiary
are owned of record and, to such counsel's knowledge, beneficially by the
Company, either directly or through a wholly-owned subsidiary of the
Company, free and clear of any perfected security interests and, to such
counsel's knowledge, any other security interests, liens, encumbrances,
equities, other rights to purchase or other claims.
(v) there are no preemptive or other rights to subscribe for or to
purchase shares of capital stock of the Company pursuant to any statute,
the articles of incorporation or bylaws of the Company or, to such
counsel's knowledge, any agreement or other instrument to which the Company
is a party as to which any person can successfully maintain an action, suit
or proceeding against the Company for violation of his or her preemptive
rights with respect to the issuance of any shares of capital stock of the
Company;
(vi) to the knowledge of such counsel, there is no pending or
threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company or any of
the Subsidiaries required to be disclosed in the Prospectus that is not
adequately disclosed in the Prospectus;
(vii) to such counsel's knowledge, there is no contract or other
document required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit, that is not described or filed as
required;
-31-
<PAGE>
(viii) all of the Company's issued and outstanding Capital Stock has
been duly authorized, validly issued and is fully paid and non-assessable
as of the date hereof and the capital stock of the Company conforms in all
material respects to the descriptions thereof under the caption
"Description of Capital Stock" in the Prospectus;
(ix) the Registration Statement has become effective under the Act;
any required filing of the Prospectus, and any supplements thereto,
pursuant to Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b); to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued,
no proceedings for that purpose have been instituted or threatened, and the
Registration Statement and the Prospectus (other than the financial
statements and supporting schedules contained therein as to which such
counsel need express no opinion) comply as to form in all material respects
with the requirements of the Act and the applicable Act Regulations; and
such counsel has no reason to believe that at the Effective Date the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus includes any untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(x) the statements in the Registration Statement and Prospectus,
insofar as they are descriptions of contracts, agreements or other legal
documents, are accurate in all material respects and present fairly the
information required to be shown;
(xi) this Agreement has been duly authorized, executed and delivered
by the Company and the Company has full corporate power and authority to
enter into this Agreement;
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required in connection with the consummation
of the transactions contemplated hereby, except the registration under the
Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters;
(xiii) neither the execution and delivery of this Agreement, nor the
consummation of any other of the transactions herein contemplated, nor the
fulfillment of the terms hereof, will result in a breach of, or constitute
a default under (a) the terms of any contract or other agreement or
instrument (i) to which the Company or any of the Subsidiaries is a party
or by which it is bound and (ii) which is either filed as an exhibit to the
Registration Statement or is identified to such counsel as being material
to the Company and the Subsidiaries, taken as a whole, and listed on a
schedule to such counsel's opinion, (b) any law, statute, rule, order,
regulation or decree of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over the Company or any
of the Subsidiaries of which such counsel is aware
-32-
<PAGE>
and which is known by such counsel to be applicable to the Company or any
of the Subsidiaries (where such conflict, breach or default would have a
Material Adverse Effect) or (c) the charter or by-laws of the Company;
(xiv) the Company Shares have been duly and validly authorized by
the Company for issuance, and the Company has full corporate power and
authority to issue, sell and deliver the Company Shares; when the Shares
are issued and delivered against payment therefor as provided by this
Agreement, the Shares will have been validly issued and will be fully paid
and nonassessable, and the issuance of such Shares will not be subject to
any statutory preemptive rights or similar statutory rights or, to such
counsel's knowledge, any other preemptive or similar rights; and the Shares
conform to the description thereof contained in the Prospectus;
(xv) the certificates for the Shares are in due and proper form
under California law and the by-laws of the Company and conform with the
form of certificates duly authorized by the Board of Directors of the
Company;
(xvi) to the knowledge of such counsel, no holder of any securities
of the Company or any other person has the right, contractual or otherwise,
to cause the Company to sell or otherwise issue to such person, or to
permit such person to underwrite the sale of, any of the Shares or the
right to have any Stock or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares
of Stock or other securities of the Company that has not been waived or
lapsed;
(xvii) the Company is not an "investment company" as defined under
the Investment Company Act or subject to registration under such Act;
(xviii) each Selling Shareholder which is not a natural person has
full right, power and authority to enter into and to perform its
obligations under the Power of Attorney and Custody Agreement to be
executed and delivered by it in connection with the transactions
contemplated herein; the Power of Attorney and Custody Agreement of each
Selling Shareholder that is not a natural person has been duly authorized
by such Selling Shareholder; the Power of Attorney and Custody Agreement of
each Selling Shareholder has been duly executed and delivered by or on
behalf of such Selling Shareholder; and the Power of Attorney and Custody
Agreement of each Selling Shareholder constitutes the valid and binding
agreement of such Selling Shareholder, enforceable in accordance with its
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles;
(xix) each of the Selling Shareholders has full right, power and
authority to enter into and to perform its obligations under this Agreement
and to sell, transfer, assign and deliver the Shares to be sold by such
Selling Shareholder hereunder;
-33-
<PAGE>
(xx) this Agreement has been duly authorized by each Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Shareholder; and
(xxi) upon the delivery of and payment for the Shares as contemplated
in this Agreement, each of the Underwriters will receive valid marketable
title to the Shares purchased by it from such Selling Shareholder, free and
clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest. In rendering such opinion, such counsel may assume that
the Underwriters are without notice of any defect in the title of the
Shares being purchased from the Selling Shareholders.
In addition, such counsel shall also state that such counsel has
participated in conferences with representatives of the Underwriters, officers
and other representatives of the Company and representatives of the independent
auditors of the Company and the Subsidiaries at which conferences the contents
of the Registration Statement and the Prospectus and related matters were
discussed and that, although such counsel is not passing upon and does not
assume any responsibility of the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus (except as
set forth in clauses (viii), (x) and (xiv) of this Exhibit B), on the basis of
the foregoing (relying as to materiality to a large extent upon officers and
other representatives of the Company), no facts have come to the attention of
such counsel which lead such counsel to believe that the Registration Statement
at the time it became effective or at the Representation Date and the Closing
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 or that the Prospectus, at the Representation Date
(unless the term "Prospectus" refers to a prospectus which has been provided to
the Underwriters by the Company for use in connection with the offering of the
Shares which differs from the Prospectus on file at the Commission at the
Representation Date, in which case at the time it is first provided to the
Underwriters for such use) or at the Closing Date, included or includes an
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, that such
counsel need not express any comment with respect to the financial statements,
supporting schedules and other financial and statistical data contained in the
Registration Statement or Prospectus.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or the State of California upon opinions
of local counsel and upon the opinion of other counsel relating to certain
Selling Shareholders, and as to questions of fact upon representations or
certificates of officers of the Company, the Selling Shareholders or officers of
the Selling Shareholders (when the Selling Shareholder is not a natural person),
and of government officials, in which case their opinion is to state that they
are so relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
-34-
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
TELESENSORY CORPORATION
Larry Israel and Robert W. Kamenski certify that:
A. They are the President and Secretary, respectively, of Telesensory
Corporation, a California corporation.
B. The Articles of Incorporation of this corporation are amended and
restated to read in full as follows:
I.
The name of this corporation is Telesensory Corporation.
II.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
This corporation is authorized to issue two classes of stock designated
"Common Stock" and "Preferred Stock." The number of shares of Common Stock which
this corporation shall have authority to issue is 40,000,000 shares. Each share
of Common Stock and Preferred Stock shall have a par value of $.02 per share.
The total number of shares of Preferred Stock which this corporation shall have
authority to issue is 5,000,000 shares. Upon the filing of these Amended and
Restated Articles of Incorporation, each outstanding share of Common Stock shall
be split into 1.25 shares of Common Stock. No fractional shares will be issued
upon such stock split. In lieu of issuing any fractional share, the corporation
shall pay the holder otherwise entitled to such fraction (after aggregating all
fractional shares issuable to such holder) a sum in cash equal to the fair
market value of such fraction on the effective date of the stock split.
<PAGE>
The Preferred Stock may be divided into such number of series as the board
of directors may determine. The board of directors is authorized to determine
and alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock, and to fix the
number of shares of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The board of directors, 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, may increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any series subsequent to the issue of shares of that
series.
IV.
Section 1. Limitation of Directors' Liability. The liability of the
----------------------------------
directors of this corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
Section 2. Indemnification of Corporate Agents. This corporation is
-----------------------------------
authorized to provide indemnification of its agents (as defined in Section 317
of the California General Corporation Law) through bylaw provisions, agreements
with the agents, vote of shareholders or disinterested directors or otherwise,
in excess of the indemnification otherwise permitted by such Section 317,
subject only to the limits on such excess indemnification set forth in Section
204 of the California General Corporation Law with respect to actions for breach
of duty to the corporation and its shareholders.
Section 3. Repeal of Modification. Any repeal or modification of the
----------------------
foregoing provisions of this Article IV shall not adversely affect any right of
indemnification or limitation of liability of an agent of this corporation
relating to acts or omissions occurring prior to such repeal or modification.
C. The foregoing amendment and restatement of the corporation's Articles
of Incorporation has been duly approved by the Board of Directors.
D. The foregoing amendment and restatement of the corporation's Articles
of Incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 of the Corporations Code. The total number of
outstanding shares of Common Stock of the corporation is 2,313,457. No shares of
Preferred Stock are outstanding. The number of shares voting in favor of the
amendment and restatement equaled or exceeded the vote required. The percentage
vote required was more than 50% of the outstanding shares of Common Stock.
-2-
<PAGE>
We declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge. Executed at Mountain View, California on August 13, 1996.
/s/ Larry Israel
--------------------------------------------
Larry Israel, President
/s/ Robert W. Kamenski
____________________________________________
Robert W. Kamenski, Secretary
-3-
<PAGE>
EXHIBIT 4.1
[LOGO OF TELESENSORY APPEARS HERE]
[ARTWORK APPEARS HERE] [ARTWORK APPEARS HERE]
CUSIP 879941 10 2
SEE REVERSE FOR CERTAIN DEFINITIONS
COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
FOUNDED 1970
- --------------------------------------------------------------------------------
This CERTIFIES that
Is the owner of
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $0.02 PER
SHARE, OF
Telesensory Corporation transferable on the books of the Corporation by said
owner in person, or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are subject to all the terms, conditions and limitations of the
Certificate of Incorporation and all amendments thereto and supplements thereof.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/[SIGNATURE APPEARS HERE] /s/[SIGNATURE APPEARS HERE]
Secretary President and Chief Executive Officer
[SEAL OF TELESENSORY APPEARS HERE]
COUNTERED SIGNED AND REGISTERED
NORWEST BANK MINNESOTA N.A.
TRANSFER AGENT
AND REGISTRAR
By
AUTHORIZED SIGNATURE
<PAGE>
- -------------------------------------------------------------------------------
[LOGO OF TELESENSORY APPEARS HERE]
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO
REQUESTS, A FULL STATEMENT OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND
LIMITATIONS OF EACH CLASS OF STOCK OR SERIES THEREOF AUTHORIZED TO BE ISSUED AND
THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE CORPORATION TO DESIGNATE AND FIX
THE RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF CLASSES OF PREFERRED STOCK
IN SERIES.
The following abbreviations, when used in the Inscription on the face of
this certification, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT- Custodian
----- ------
(cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts
to Minors
JT WROS - as joint tenants with right of Act
survivorship and not as tenants ---------------
in common (State)
CUTMA- Custodian under
----- ----
California Uniform
Transfer to Minors Act
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
------------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the Common Stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
---------------------------------------------
Attorney to transfer the said Shares on the within-named Corporation with full
power of substitution in the premises.
Dated
------------------------------
------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed:
By
-------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-16.
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT 5.1
-----------
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
September 4, 1996
Telesensory Corporation
455 North Bernardo Avenue
Mountain View, CA 94043
Re: Registration Statement on Form S-1
--------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission (the "Commission") on July 31, 1996 (as
such may be further amended or supplemented, the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended
(the "Act"), of up to 3,335,000 shares of your Common Stock (the "Shares"). The
Shares, which include up to 435,000 shares of Common Stock issuable pursuant to
an over-allotment option granted to the underwriters (the "Underwriters"), are
to be sold to the Underwriters as described in such Registration Statement for
sale to the public. Of the shares being sold, 2,710,000 are being sold by the
Company (including the 435,000 Shares of Common Stock in the over-allotment
option) and 625,000 are being sold by certain shareholders of the Company. As
your counsel in connection with this transaction, we have examined the
proceedings proposed to be taken by you in connection with the issuance and sale
of the Shares.
Based on the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Shares and upon completion of the proceedings taken
in order to permit such transactions to be carried out in accordance with the
securities laws of various states where required, the Shares, when issued and
sold in the manner described in the Registration Statement, will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
which has been approved by us, as such may be further amended or supplemented,
or incorporated by reference in any Registration Statement relating to the
prospectus file pursuant to Rule 462(b) of the Act.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 10.1
TELESENSORY CORPORATION
1985 INCENTIVE STOCK OPTION PLAN
(As Amended 8/15/85, 1/1/87, 8/22/89,
06/12/91 and 09/12/91)
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
Options granted hereunder may be either "incentive stock options", as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
"non-statutory stock options", at the discretion of the Board and as reflected
in the terms of the written option agreement.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" shall mean the Committee, if one has been appointed, or
-----
the Board of Directors of the Company, if no Committee is appointed.
(b) "Common Stock" shall mean the Common Stock of the Company.
------------
(c) "Company" shall mean Telesensory Corporation, a California
-------
corporation.
(d) "Committee" shall mean the Committee appointed by the Board of
---------
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed.
(e) "Continuous Status as an Employee or Consultant" shall mean the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Board; provided that such leave is for a period
of not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(f) "Employee" shall mean any person, including officers and
--------
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(g) "Consultant" shall mean any person who is engaged by the Company
------------
or any subsidiary to render consulting services and is compensated for such
consulting services, and any director of the Company whether compensated for
such services or not; provided that if and in the
<PAGE>
event the Company registers any class of any equity security pursuant to Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
term Consultant shall thereafter not include directors who are not compensated
for their services or are paid only a director's fee by the Company.
(h) "Incentive Stock Option" shall mean an Option intended to
----------------------
qualify as an incentive stock option within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended.
(i) "Option" shall mean a stock option granted pursuant to the Plan.
------
(j) "Optioned Stock" shall mean the Common Stock subject to an
--------------
Option.
(k) "Optionee" shall mean an Employee or Consultant who receives an
--------
Option.
(m) "Plan" shall mean this 1985 Incentive Stock Option Plan.
----
(n) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(o) "Subsidiary" shall mean a "subsidiary corporation", whether now
----------
or hereafter existing, as defined in Section 425(f) of the Internal Revenue Code
of 1986, as amended.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 595,000 shares of Common Stock. The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure. The Plan shall be administered by the Board of
---------
Directors of the Company.
(i) Subject to subparagraph (ii), the Board of Directors may
appoint a Committee consisting of not less than two members of the Board of
Directors to administer the Plan on behalf of the Board of Directors, subject to
such terms and conditions as the Board of Directors may prescribe. Once
appointed, the Committee shall continue to serve until otherwise directed by the
Board of Directors. From time to time the Board of Directors may increase the
size of the Committee and appoint additional members thereof, remove members
(with or without cause) and
<PAGE>
appoint new members in substitution therefor, fill vacancies however caused, or
remove all members of the Committee and thereafter directly administer the Plan.
Members of the Board who are either eligible for Options or have been
granted Options may vote on any matters affecting the administration of the Plan
or the grant of any Options pursuant to the Plan, except that no such member
shall act upon the granting of an Option to himself, but any such member may be
counted in determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting of Options to him.
(ii) Notwithstanding the foregoing subparagraph (i), if and in
any event the Company registers any class of any equity security pursuant to
Section 12 of the Exchange Act, from the effective date of such registration
until six months after the termination of such registration, any grants of
options to officers or directors shall only be made by the Board of Directors;
provided, however, that if a majority of the Board of Directors is eligible to
participate in this Plan or any other stock option or other stock plan of the
Company or any of its affiliates, or has been eligible at any time within the
preceding year, any grants of options to directors must be made by, or only in
accordance with the recommendation of, a Committee consisting of three or more
persons, who may but need not be directors or employees of the Company,
appointed by the Board of Directors and having full authority to act in the
matter, none of whom is eligible to participate in this Plan or any other stock
option or other stock plan of the Company or any of its affiliates, or has been
eligible at any time within the preceding year. Any Committee administering the
Plan with respect to grants to officers who are not also directors shall conform
to the requirements of the preceding sentence. Once appointed, the Committee
shall continue to serve until otherwise directed by the Board of Directors.
Subject to the foregoing, from time to time the Board of Directors may increase
the size of the Committee and appoint additional members thereof, remove members
(with or without cause) and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and thereafter
directly administer the Plan.
(b) Powers of the Board. Subject to the provisions of the Plan, the
-------------------
Board shall have the authority, in its discretion: (i) to grant Incentive Stock
Options, in accordance with Section 422 of the Internal Revenue Code of 1986, as
amended, or "non-statutory stock options"; (ii) to determine, upon review of
relevant information and in accordance with Section 8(b) of the Plan, the fair
market value of the Common Stock; (iii) to determine the exercise price per
share of Options to be granted, which exercise price shall be determined in
accordance with Section 8(a) of the Plan; (iv) to determine the Employees or
Consultants to whom, and the time or times at which, Options shall be granted
and the number of shares to be represented by each Option; (v) to interpret the
Plan; (vi) to prescribe, amend and rescind rules and regulations relating to the
Plan; (vii) to determine the terms and provisions of each Option granted (which
need not be identical) and, with the consent of the holder thereof, modify or
amend each Option; (viii) to accelerate or defer (with the consent of the
Optionee) the exercise date of any Option, consistent with the provisions of
Section 5 of the Plan; (ix) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted by the Board; and (x) to make all other determinations deemed necessary
or advisable for the administration of the Plan.
-3-
<PAGE>
(c) Effect of Board's Decision. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
5. Eligibility.
-----------
(a) Options may be granted only to Employees and Consultants.
Incentive Stock Options may be granted only to Employees. An Employee or
Consultant who has been granted an Option may, if he is otherwise eligible, be
granted an additional Option or Options.
(b) No Incentive Stock Option may be granted to an Employee which,
when aggregated with all other Incentive Stock Options granted to such Employee
by the Company or any Parent or Subsidiary, would result in Shares having an
aggregate fair market value (determined for each Share as of the date of grant
of the Option covering such Share) in excess of $100,000 becoming first
available for purchase upon exercise of one or more Incentive Stock Options
during any calendar year.
(c) Section 5(b) of the Plan shall apply only to an Incentive Stock
Option evidenced by an "Incentive Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall qualify as an
Incentive Stock Option. Section 5(b) of the Plan shall not apply to any Option
evidenced by a "Nonstatutory Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall be a
nonstatutory stock option.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his right or the Company's right
to terminate his employment or consulting relationship at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 17 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 13 of the Plan.
7. Term of Option. The term of each Option shall be ten (10) years from
--------------
the date of grant thereof or such shorter term as may be provided in the Stock
Option Agreement. However, in the case of an Option granted to an Optionee who,
at the time the Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter time as may be provided in the Stock Option
Agreement.
8. Exercise Price and Consideration.
--------------------------------
-4-
<PAGE>
(a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the fair
market value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than 100% of the fair market value per Share on the date of
grant.
(ii) In the case of an Option granted on or after the effective
date of registration of any class of equity security of the Company pursuant to
Section 12 of the Exchange Act and prior to six months after the termination of
such registration, the per Share exercise price shall be no less than 100% of
the fair market value per Share on the date of grant.
(iii) In the case of any Option, the per Share exercise price
shall be no less than 85% of the fair market value per Share on the date of
grant.
(b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the mean of the bid and
asked prices of the Common Stock for the date of grant, as reported in the Wall
Street Journal (or, if not so reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotation (NASDAQ) System) or, in
the event the Common Stock is listed on a stock exchange, the fair market value
per Share shall be the closing price on such exchange on the date of grant of
the Option, as reported in the Wall Street Journal.
(c) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Board and may consist entirely of cash, check, promissory note, other Shares
of Common Stock having a fair market value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said option shall be
exercised, or any combination of such methods of payment, or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under Sections 408 and 409 of the California General Corporation Law.
In making its determination as to the type of consideration to accept, the Board
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company (Section 315(b) of the California General Corporation Law).
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board,
-5-
<PAGE>
including performance criteria with respect to the Company and/or the Optionee,
and shall be permissible under the terms of the Plan; provided, however, that an
Incentive Stock Option granted prior to January 1, 1987 shall not be exercisable
while there is outstanding any incentive stock option which was granted, before
the granting of such Incentive Stock Option, to the same Optionee to purchase
stock of the Company, any Parent or Subsidiary, or any predecessor corporation
of such corporations. For purposes of this provision, an incentive stock option
shall be treated as outstanding until such option is exercised in full or
expires by reason of lapse of time.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. If an
--------------------------------------------------
Employee or Consultant ceases to serve as an Employee or Consultant (as the case
may be), he may, but only within thirty (30) days (or such other period of time
not exceeding three (3) months as is determined by the Board at the time of
grant of the Option) after the date he ceases to be an Employee or Consultant
(as the case may be) of the Company, exercise his Option to the extent that he
was entitled to exercise it at the date of such termination. To the extent that
he was not entitled to exercise the Option at the date of such termination, or
if he does not exercise such Option (which he was entitled to exercise) within
the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
----------------------
Section 9(b) above, in the event an Employee or Consultant is unable to continue
his employment or consulting relationship (as the case may be) with the Company
as a result of his total and permanent disability (as defined in Section
37(e)(3) of the Internal Revenue Code), he may, but only within six (6) months
(or such other period of time not exceeding twelve (12) months as is determined
by the Board at the time of grant of the Option) from the date of termination,
exercise his Option to the extent he was entitled to exercise it at the date of
such termination. To the extent that he was not
-6-
<PAGE>
entitled to exercise the Option at the date of termination, or if he does not
exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee:
-----------------
(i) during the term of the Option who is at the time of his
death an Employee or Consultant of the Company and who shall have been
in Continuous Status as an Employee or Consultant since the date of
grant of the Option, the Option may be exercised, at any time within
six (6) months (or such other period of time as is determined by the
Board at the time of grant of the Option) following the date of death,
by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued as of the date of death; or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Board at the time
of grant of the Option) after the termination of Continuous Status as
an Employee or Consultant, the Option may be exercised, at any time
within six (6) months following the date of death, by the Optionee's
estate or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
10. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
----------------------------------------------------
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
-7-
<PAGE>
In the event of the proposed dissolution or liquidation of the
Company, the Board shall notify the Optionee at least fifteen (15) days prior to
such proposed action. To the extent it has not been previously exercised, the
Option will terminate immediately prior to the consummation of such proposed
action. In the event of a merger of the Company with or into another
corporation, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation. In the event that such successor corporation does not
agree to assume the Option or to substitute an equivalent option, the Board
shall, in lieu of such assumption or substitution, provide for the Optionee to
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. If the Board
makes an Option fully exercisable in lieu of assumption or substitution in the
event of a merger, the Board shall notify the Optionee that the Option shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the Option will terminate upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval of
the shareholders of the Company in the manner described in Section 17 of the
Plan:
(i) any increase in the number of Shares subject to the Plan,
other than in connection with an adjustment under Section 11 of the
Plan;
(ii) any change in the designation of the class of employees or
consultants eligible to be granted Options; or
(iii) if the Company has a class of equity security registered
under Section 12 of the Exchange Act at the time of such revision or
amendment, any material increase in the benefits accruing to
participants under the Plan.
(b) Shareholder Approval. If any amendment requiring shareholder
--------------------
approval under Section 13(a) of the Plan is made subsequent to the first
registration of any class of equity security by the Company under Section 12 of
the Exchange Act, such shareholder approval shall be solicited as described in
Section 17(a) of the Plan.
-8-
<PAGE>
(c) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
17. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve months before or after
the date the Plan is adopted. If such shareholder approval is obtained at a
duly held shareholders' meeting, it may be obtained by the affirmative vote of
the holders of a majority of the outstanding shares of the Company present or
represented and entitled to vote thereon. If and in the event that the Company
registers any class of any equity security pursuant to Section 12 of the
Exchange Act, the approval of such shareholders of the Company shall be:
(a) (1) solicited substantially in accordance with Section 14(a) of
the Exchange Act and the rules and regulations promulgated thereunder, or (2)
solicited after the Company has fur-
-9-
<PAGE>
nished in writing to the holders entitled to vote substantially the same
information concerning the Plan as that which would be required by the rules and
regulations in effect under Section 14(a) of the Exchange Act at the time such
information is furnished; and
(b) obtained at or prior to the first annual meeting of shareholders
held subsequent to the first registration of any class of equity securities of
the Company under Section 12 of the Exchange Act.
If such shareholder approval is obtained by written consent, it must
be obtained by the unanimous written consent of all shareholders of the Company.
18. Information to Optionees. The Company shall provide to each Optionee,
------------------------
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
-10-
<PAGE>
TELESENSORY CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
TeleSensory Corporation, a California corporation (the "Company"), has
granted to________________, (the "Optionee"), an option to purchase a total of
___________ shares of Common Stock, at the price determined as provided herein,
and in all respects subject to the terms, definitions and provisions of the 1985
Incentive Stock Option Plan (the "Plan") adopted by the Company which is
incorporated herein by reference. The terms defined in the Plan shall have the
same defined meanings herein.
1. Nature of the Option. This Option is intended to qualify as an
--------------------
Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. Exercise Price. The exercise price is $______ for each share of Common
--------------
Stock, which price is not less than the fair market value per share of the
Common Stock on the date of grant.
3. Exercise of Option. This Option shall be exercisable during its terms
------------------
in accordance with the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
-----------------
(a) Subject to subsections 3(i)(b) and (c), below, this Option
shall be exercisable cumulatively, to the extent of 3% of the Shares subject to
the Option for each month which has expired after the vesting start set forth
below.
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 7, 8, and 9 below.
(ii) Method of Exercise. This Option shall be exercisable by written
------------------
notice which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the exercise
price. This Option shall be deemed to be exercised upon receipt by the Company
of such written notice accompanied by the exercise price.
No shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange
<PAGE>
upon which the Shares may then be listed. Assuming such compliance, the Shares
shall be considered transferred to the Optionee on the date on which the Option
is exercised with respect to such Shares.
4. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company his Investment Representation Statement in the
form attached hereto as Exhibit A, and shall read the applicable rules of the
Commissioner of Corporations attached to such Investment Representation
Statement.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Optionee:
(i) Cash;
(ii) Check;
(iii) Surrender of other shares of Common Stock of the Company of a
value equal to the exercise price of the Shares as to which the Option is being
exercised, provided that the shares so surrendered shall have been held by
Optionee for at least six (6) months.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
Federal or State securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee. If Optionee ceases to serve as
------------------------------------
an Employee, he may, but only within 30 days after the date he ceases to be an
Employee of the Company, exercise this Option to the extent that he was entitled
to exercise it at the date of such termination. To the extent that he was not
entitled to exercise this Option at the date of such termination, or if he does
not exercise this Option within the time specified herein, the Option shall
terminate.
8. Disability of Optionee, Notwithstanding the provisions of Section 7
----------------------
above, if Optionee is unable to continue his employment with the Company as a
result of his total and permanent disability (as defined in Section 37(e)(3) of
the Internal Revenue Code), he may, but only within six months from the date of
termination of employment, exercise his Option to the extent he was entitled to
exercise it at the date of such termination. To the extent that he was not
entitled to exercise the Option at the date of termination, or if he does not
exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
9. Death of Optionee. In the event of the death of Optionee.
-----------------
-2-
<PAGE>
(i) During the term of this Option and while an Employee of the
Company and having been in Continuous Status as an Employee since the date of
grant of the Option, the Option may be exercised, at any time within six (6)
months following the date of death, by Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued as of the date of death; or
(ii) Within 30 days after the termination of Optionee's Continuous
Status as an Employee, the Option may be exercised, at any time within six (6)
months following the date of death, by Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
10. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him. The terms of this
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
11. Term of Option. This Option expires on February 28, 1999 and may be
--------------
exercised during such term only in accordance with the Plan and the terms of
this Option.
12. Early Disposition of Stock. Optionee understands that if he disposes
--------------------------
of any Shares received under this Option within two (2) years after the date of
this Agreement or within one (1) year after such Shares were transferred to him,
he will be treated for Federal income tax purposes as having received ordinary
income at the time of such disposition in an amount equal to the excess of the
fair market value of the Shares at the time such Shares were transferred to him
over the price paid for the Shares. Optionee hereby agrees to notify the
------------------------------------
Company in writing within thirty (30) days after the date of any such
- ---------------------------------------------------------------------
disposition. Optionee understands that if he disposes of such Shares at any
- -----------
time after the expiration of such two-year and one-year holding periods, any
gain on such sale will be taxed at capital gain rates.
DATE OF GRANT:
VESTING START DATE:
DATE OF ISSUE:
TeleSensory Corporation
a California Corporation
By: ____________________________________
-3-
<PAGE>
Title: _________________________________
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
annexed hereto, and represents that he is familiar with the terms and provisions
thereof, and hereby accepts this Option subject to all of the terms and
provisions thereof. Optionee hereby agrees to accept as binding, conclusive and
final all decisions or interpretations of the Board upon any questions arising
under the Plan.
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING G SERVICE AS AN EMPLOYEE OR
CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED THIS OPTION OR ACQUIRING SHARES THEREUNDER). THE OPTIONEE UNDERSTANDS
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN, WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER ANY RIGHT WITH RESPECT TO
CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY
WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS EMPLOYMENT AT ANY TIME
WITH OR WITHOUT CAUSE.
Dated: _____________
_________________________________________
Optionee
-4-
<PAGE>
EXHIBIT 10.2
TELESENSORY CORPORATION
STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in this Stock Option
Agreement shall have the same defined meanings as in the underlying Stock Plan
under which these options are granted.
I. NOTICE OF STOCK OPTION GRANT
To: ___________________
You have been granted an option to purchase Common Stock of the Company,
under the Company's ( ) 1993 Executive Stock Plan or ( ) 1995 Stock Plan,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
20% at the end of each 12-month period from the Date of Grant,
cumulative as to unexercised portion.
<PAGE>
TERMINATION PERIOD:
This Option may be exercised for 30 days after termination of your
employment or consulting relationship, or such longer period as may be
applicable upon death or disability of Optionee as provided in the Plan. In the
event of the Optionee's change in status from Employee to Consultant or
Consultant to Employee, this Option Agreement shall remain in effect. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
A. GRANT OF OPTION. TeleSensory Corporation, a California corporation
(the "Company"), hereby grants to the Optionee named in the Notice of Grant (the
"Optionee"), an option (the "Option") to purchase the total number of shares of
Common Stock (the "Shares") set forth in the Notice of Grant, at the exercise
price per share set forth in the Notice of Grant (the "Exercise Price") subject
to the terms, definitions and provisions of the Stock Plan (the "Plan") adopted
by the Company, which is incorporated herein by reference. Unless otherwise
defined herein, the terms defined in the Plan shall have the same defined
meanings in this Option Agreement.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
B. EXERCISE OF OPTION.
(a) Right to Exercise. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement. In the
event of Optionee's death, disability or other termination of the employment or
consulting relationship, this Option shall be exercisable in accordance with the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by written
notice (in the form attached as Exhibit A) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock
-2-
<PAGE>
exchange upon which the Shares may then be listed. Assuming such compliance, for
income tax purposes the Shares shall be considered transferred to the Optionee
on the date on which the Option is exercised with respect to such Shares.
C. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, if required by the Company, concurrently with the exercise of
all or any portion of this Option, deliver to the Company his or her Investment
Representation Statement in the form attached hereto as Exhibit B, and shall
read the applicable rules of the Commissioner of Corporations attached to such
Investment Representation Statement.
D. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of
the following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
(c) surrender of other shares of Common Stock of the Company which (A)
in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by the Optionee for more than six (6) months on the date of
surrender, and (B) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(d) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the Exercise Price.
E. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board.
F. TERMINATION OF RELATIONSHIP. In the event an Optionee's Continuous
Status as an Employee or Consultant terminates, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
exercise this Option during the Termination Period set out in the Notice of
Grant. To the extent that Optionee was not entitled to exercise this Option at
the date of such termination, or if Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
-3-
<PAGE>
G. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6
above, in the event of termination of an Optionee's consulting relationship or
Continuous Status as an Employee as a result of his or her disability, Optionee
may, but only within twelve (12) months from the date of such termination (and
in no event later than the expiration date of the term of such Option as set
forth in the Option Agreement), exercise the Option to the extent otherwise
entitled to exercise it at the date of such termination; provided, however, that
if such disability is not a "disability" as such term is defined in Section
22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive
Stock Option shall cease to be treated as an Incentive Stock Option and shall be
treated for tax purposes as a Nonstatutory Stock Option on the day three months
and one day following such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
H. DEATH OF OPTIONEE. In the event of termination of Optionee's
Continuous Status as an Employee or Consultant as a result of the death of
Optionee, the Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent the Optionee could exercise the Option at
the date of death.
I. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
J. TAX CONSULTATION. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
K. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) Legends. Optionee understands and agrees that the Company shall
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
-4-
<PAGE>
UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AS SET FORTH IN THE EXERCISE NOTICE BETWEEN
THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY
BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER
RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF
THESE SHARES.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
Optionee understands that transfer of the Shares may be restricted by
Section 260.141.11 of the Rules of the California Corporations Commissioner, a
copy of which is attached to Exhibit B, the Investment Representation Statement.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
L. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in the Plan regarding Options designated as Incentive Stock Options and Options
granted to more than ten percent (10%) shareholders shall apply to this Option.
M. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of
this Option of some of the federal and California tax consequences of exercise
of this Option and disposition of
-5-
<PAGE>
the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND
REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE
EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of ISO. If this Option qualifies as an ISO, there will be
no regular federal income tax liability or California income tax liability upon
the exercise of the Option, although the excess, if any, of the Fair Market
Value of the Shares on the date of exercise over the Exercise Price will be
treated as an adjustment to the alternative minimum tax for federal tax purposes
and may subject the Optionee to the alternative minimum tax in the year of
exercise.
(b) Exercise of ISO Following Disability. If the Optionee's
Continuous Status as an Employee or Consultant terminates as a result of
disability that is not total and permanent disability as defined in Section
22(e)(3) of the Code, to the extent permitted on the date of termination, the
Optionee must exercise an ISO within 90 days of such termination for the ISO to
be qualified as an ISO.
(c) Exercise of Nonstatutory Stock Option. There may be a regular
federal income tax liability and California income tax liability upon the
exercise of a Nonstatutory Stock Option. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee or a former Employee, the
Company will be required to withhold from Optionee's compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(d) Disposition of Shares. In the case of an NSO, if Shares are held
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal and California income tax
purposes. In the case of an ISO, if Shares transferred pursuant to the Option
are held for at least one year after exercise and are disposed of at least two
years after the Date of Grant, any gain realized on disposition of the Shares
will also be treated as long-term capital gain for federal and California income
tax purposes. If Shares purchased under an ISO are disposed of within such one-
year period or within two years after the Date of Grant, any gain realized on
such disposition will be treated as compensation income (taxable at ordinary
income rates) to the extent of the difference between the Exercise Price and the
lesser of (1) the Fair Market Value of the Shares on the date of exercise, or
(2) the sale price of the Shares.
(e) Notice of Disqualifying Disposition of ISO Shares. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
-6-
<PAGE>
N. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
O. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Board or committee shall be final and binding on the
Company and on Optionee.
P. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and
construed in accordance with the laws of the State of California excluding that
body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
Q. NOTICES. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
R. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
S. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by California law except for that body of
law pertaining to conflict of laws.
TELESENSORY CORPORATION
a California corporation
By: ____________________________________
-7-
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: _______________________________________
Optionee
Residence Address:
Telephone: ____________________________
Social Security No. ___________________
-8-
<PAGE>
EXHIBIT A
---------
1993 STOCK PLAN
EXERCISE NOTICE
TeleSensory Corporation
455 North Bernardo Avenue
Mountain View, CA 94039-7455
Attention: Secretary
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of TeleSensory Corporation
(the "Company") under and pursuant to the ( ) 1993 Executive Stock Plan or
( ) 1993 Stock Plan (the "Plan") and the [ ] Incentive [ ] Nonstatutory Stock
Option Agreement dated ________, 19___ (the "Option Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
3. Rights as Shareholder. Until the stock certificate evidencing such
---------------------
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 12 of the Plan.
Optionee shall enjoy rights as a shareholder until such time as
Optionee disposes of the Shares or the Company and/or its assignee(s) exercises
the Right of First Refusal hereunder. Upon such exercise, Optionee shall have
no further rights as a holder of the Shares so purchased except the right to
receive payment for the Shares so purchased in accordance with the provisions of
this Agreement, and Optionee shall forthwith cause the certificate(s) evidencing
the Shares so purchased to be surrendered to the Company for transfer or
cancellation.
4. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
<PAGE>
5. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
full Exercise Price for the Shares.
6. Entire Agreement. The Plan and Notice of Grant/Option Agreement are
----------------
incorporated herein by reference. This Agreement, the Plan, the Option
Agreement and the Investment Representation Statement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and
Purchaser with respect to the subject matter hereof, and may not be modified
adversely to the Purchaser's interest except by means of a writing signed by the
Company and Purchaser.
Submitted by: Accepted by:
OPTIONEE: TeleSensory Corporation
By: __________________________
Its: _________________________
(Signature)
Address: Address:
- ------- -------
___________________________ 455 North Bernardo Avenue
Mountain View, CA 94039-7455
___________________________
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : TELESENSORY CORPORATION
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of
California and any other legend required under applicable state securities laws.
<PAGE>
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer qualifies under Rule
701 at the time of the grant of the Option to the Optionee, the exercise will be
exempt from registration under the Securities Act. In the event the Company
becomes subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer
period as any market stand-off agreement may require) the Securities exempt
under Rule 701 may be resold, subject to the satisfaction of certain of the
conditions specified by Rule 144, including: (1) the resale being made through a
broker in an unsolicited "broker's transaction" or in transactions directly with
a market maker (as said term is defined under the Securities Exchange Act of
1934); and, in the case of an affiliate, (2) the availability of certain public
information about the Company, (3) the amount of Securities being sold during
any three month period not exceeding the limitations specified in Rule 144(e),
and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than three years, the satisfaction of the conditions set forth
in sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any securities of the Company under the Securities Act, Optionee
shall not sell or otherwise transfer any Shares or other securities of the
Company during the 180-day period following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however, that
such restriction shall only apply to the first registration statement of the
Company to become effective under the Securities Act which include securities to
be sold on behalf of the Company to the public in an underwritten public
offering under the Securities Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such 180-day period.
(e) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
-2-
<PAGE>
Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.
(f) Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities without the consent of the Commissioner of Corporations of
California. Optionee has read the applicable Commissioner's Rules with respect
to such restriction, a copy of which is attached.
Signature of Optionee:
_____________________________________________
Date:________________, 19__
-3-
<PAGE>
EXHIBIT 10.3
TELESENSORY CORPORATION
1995 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant of an Option and subject to the applicable provisions of Section 422 of
the Code and the regulations promulgated thereunder. Stock Purchase Rights may
also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a Committee appointed by the Board of Directors
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means TeleSensory Corporation, a California corporation.
-------
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any Director of the Company whether
compensated for such services or not.
(i) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company, any Parent or Subsidiary
is not interrupted or terminated. Continuous Status as an Employee or Consultant
shall not be considered interrupted in the case of (i) any leave of absence
approved by the Company or (ii) transfers between locations of
<PAGE>
the Company or between the Company, its Parent, any Subsidiary, or any
successor. A leave of absence approved by the Company shall include sick leave,
military leave, or any other personal leave approved by an authorized
representative of the Company. For purposes of Incentive Stock Options, no such
leave may exceed 90 days, unless reemployment upon expiration of such leave is
guaranteed by statute or contract, including Company policies. If reemployment
upon expiration of a leave of absence approved by the Company is not so
guaranteed, on the 91st day of such leave any Incentive Stock Option held by the
Optionee shall cease to be treated as an Incentive Stock Option and shall be
treated for tax purposes as a Nonstatutory Stock Option.
(j) "Director" means a member of the Board of Directors of the
--------
Company.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option which is intended to
----------------------
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(o) "Nonstatutory Stock Option" means an Option which does not qualify
-------------------------
as an Incentive Stock Option.
-2-
<PAGE>
(p) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
------
(r) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(s) "Optionee" means an Employee or Consultant who receives an Option
--------
or Stock Purchase Right.
(t) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(u) "Plan" means this 1995 Stock Plan.
----
(v) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(w) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
-------------
of 1934, as amended.
(x) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(y) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(z) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to Option
or sold pursuant to a Stock Purchase Right under the Plan is 400,000 Shares.
The Shares may be authorized but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an option
exchange program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan,
upon exercise of either an Option or Stock Purchase Right, shall not be returned
to the Plan and shall not become available for future distribution under the
Plan, except that if Shares of Restricted Stock are repurchased by the Company
at their original purchase price, such Shares shall become available for future
grant under the Plan.
-3-
<PAGE>
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be
------------------------------
administered by different Committees with respect to different groups of
Employees and Consultants.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the Plan shall be administered by the
Board or a Committee of two or more "non-employee directors" within the meaning
of Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange upon which the Common
Stock is listed, the Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(m) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of Shares to be covered by each such
award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions of any award granted
hereunder;
-4-
<PAGE>
(vii) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted; and
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options or Stock Purchase Rights.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if otherwise eligible, be granted additional Options
or Stock Purchase Rights.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of Shares subject to an Optionee's Incentive Stock Options granted by the
Company, any Parent or Subsidiary, which become exercisable for the first time
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted.
The Fair Market Value of the Shares shall be determined as of the time the
Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuation of his or her
employment or consulting relationship with the Company, nor shall it interfere
in any way with his or her right or the Company's right to terminate his or her
employment or consulting relationship at any time, with or without cause.
(d) The following limitations shall apply to grants of Options and
Stock Purchase Rights to Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 100,000 Shares.
(ii) The foregoing limitation shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 12.
-5-
<PAGE>
(iii) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 12), the cancelled Option shall be counted against the
limit set forth in Section 5(d)(i). For this purpose, if the exercise price of
an Option is reduced, such reduction will be treated as a cancellation of the
Option and the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company, as described in Section 18 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 14 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. In the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of such
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than the Fair Market Value per Share on the date
of grant.
-6-
<PAGE>
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
a broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) hereof. Until
the issuance (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote, receive dividends or any other rights
as a shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate promptly upon exercise of the Option. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 12 hereof.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. In the event
----------------------------------------------------
of termination of an Optionee's Continuous Status as an Employee or Consultant
(but not in the event of an Optionee's change of status from Employee to
Consultant (in which case an Employee's
-7-
<PAGE>
Incentive Stock Option shall automatically convert to a Nonstatutory Stock
Option on the date three (3) months and one day following such change of status)
or from Consultant to Employee), such Optionee may, but only within such period
of time as is determined by the Administrator, of at least thirty (30) days,
with such determination in the case of an Incentive Stock Option not exceeding
three (3) months after the date of such termination (but in no event later than
the expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that the Optionee was
entitled to exercise it at the date of such termination. To the extent that the
Optionee was not entitled to exercise the Option at the date of such
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event of termination of an
----------------------
Optionee's Continuous Status as an Employee or Consultant as a result of his or
her disability, the Optionee may, but only within twelve (12) months from the
date of such termination (and in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), exercise the Option
to the extent otherwise entitled to exercise it at the date of such termination.
To the extent that the Optionee was not entitled to exercise the Option at the
date of termination, or if the Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant) by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent that the Optionee was entitled to exercise the Option on the date of
death. If, at the time of death, the Optionee was not entitled to exercise his
or her entire Option, the Shares covered by the unexercisable portion of the
Option shall immediately revert to the Plan. If, after the Optionee's death,
the Optionee's estate or a person who acquires the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
-8-
<PAGE>
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed thirty (30) days from the date
upon which the Administrator makes the determination to grant the Stock Purchase
Right. The offer shall be accepted by execution of a Restricted Stock purchase
agreement in the form determined by the Administrator. Shares purchased
pursuant to the grant of a Stock Purchase Right shall be referred to herein as
"Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have
-9-
<PAGE>
been "effected without receipt of consideration." Such adjustment shall be made
by the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
-10-
<PAGE>
13. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or discontinue the Plan. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall impair the rights of any Optionee, unless mutually agreed
otherwise between the Optionee and the Administrator, which agreement must be in
writing and signed by the Optionee and the Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an Option or Stock Purchase Right,
the Company may require the person exercising such Option or Stock Purchase
Right to represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by any of the aforementioned relevant
provisions of law.
16. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
17. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written agreements in such form as the Administrator shall approve from time to
time.
-11-
<PAGE>
18. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange upon which the Common Stock is listed.
-12-
<PAGE>
TELESENSORY CORPORATION
STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in this Stock Option
Agreement shall have the same defined meanings as in the underlying Stock Plan
under which these options are granted.
I. NOTICE OF STOCK OPTION GRANT
To: ___________________
You have been granted an option to purchase Common Stock of the Company,
under the Company's ( ) 1993 Executive Stock Plan or ( ) 1995 Stock Plan,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
20% at the end of each 12-month period from the Date of Grant,
cumulative as to unexercised portion.
<PAGE>
TERMINATION PERIOD:
This Option may be exercised for 30 days after termination of your
employment or consulting relationship, or such longer period as may be
applicable upon death or disability of Optionee as provided in the Plan. In the
event of the Optionee's change in status from Employee to Consultant or
Consultant to Employee, this Option Agreement shall remain in effect. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
A. GRANT OF OPTION. TeleSensory Corporation, a California corporation
(the "Company"), hereby grants to the Optionee named in the Notice of Grant (the
"Optionee"), an option (the "Option") to purchase the total number of shares of
Common Stock (the "Shares") set forth in the Notice of Grant, at the exercise
price per share set forth in the Notice of Grant (the "Exercise Price") subject
to the terms, definitions and provisions of the Stock Plan (the "Plan") adopted
by the Company, which is incorporated herein by reference. Unless otherwise
defined herein, the terms defined in the Plan shall have the same defined
meanings in this Option Agreement.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
B. EXERCISE OF OPTION.
(a) Right to Exercise. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement. In the
event of Optionee's death, disability or other termination of the employment or
consulting relationship, this Option shall be exercisable in accordance with the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by written
notice (in the form attached as Exhibit A) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock
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<PAGE>
exchange upon which the Shares may then be listed. Assuming such compliance, for
income tax purposes the Shares shall be considered transferred to the Optionee
on the date on which the Option is exercised with respect to such Shares.
C. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, if required by the Company, concurrently with the exercise of
all or any portion of this Option, deliver to the Company his or her Investment
Representation Statement in the form attached hereto as Exhibit B, and shall
read the applicable rules of the Commissioner of Corporations attached to such
Investment Representation Statement.
D. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of
the following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
(c) surrender of other shares of Common Stock of the Company which (A)
in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by the Optionee for more than six (6) months on the date of
surrender, and (B) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(d) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the Exercise Price.
E. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board.
F. TERMINATION OF RELATIONSHIP. In the event an Optionee's Continuous
Status as an Employee or Consultant terminates, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
exercise this Option during the Termination Period set out in the Notice of
Grant. To the extent that Optionee was not entitled to exercise this Option at
the date of such termination, or if Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
-3-
<PAGE>
G. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6
above, in the event of termination of an Optionee's consulting relationship or
Continuous Status as an Employee as a result of his or her disability, Optionee
may, but only within twelve (12) months from the date of such termination (and
in no event later than the expiration date of the term of such Option as set
forth in the Option Agreement), exercise the Option to the extent otherwise
entitled to exercise it at the date of such termination; provided, however, that
if such disability is not a "disability" as such term is defined in Section
22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive
Stock Option shall cease to be treated as an Incentive Stock Option and shall be
treated for tax purposes as a Nonstatutory Stock Option on the day three months
and one day following such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
H. DEATH OF OPTIONEE. In the event of termination of Optionee's
Continuous Status as an Employee or Consultant as a result of the death of
Optionee, the Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent the Optionee could exercise the Option at
the date of death.
I. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
J. TAX CONSULTATION. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
K. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) Legends. Optionee understands and agrees that the Company shall
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
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<PAGE>
UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AS SET FORTH IN THE EXERCISE NOTICE BETWEEN
THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY
BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER
RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF
THESE SHARES.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
Optionee understands that transfer of the Shares may be restricted by
Section 260.141.11 of the Rules of the California Corporations Commissioner, a
copy of which is attached to Exhibit B, the Investment Representation Statement.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
L. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in the Plan regarding Options designated as Incentive Stock Options and Options
granted to more than ten percent (10%) shareholders shall apply to this Option.
M. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of
this Option of some of the federal and California tax consequences of exercise
of this Option and disposition of
-5-
<PAGE>
the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND
REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE
EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of ISO. If this Option qualifies as an ISO, there will be
no regular federal income tax liability or California income tax liability upon
the exercise of the Option, although the excess, if any, of the Fair Market
Value of the Shares on the date of exercise over the Exercise Price will be
treated as an adjustment to the alternative minimum tax for federal tax purposes
and may subject the Optionee to the alternative minimum tax in the year of
exercise.
(b) Exercise of ISO Following Disability. If the Optionee's
Continuous Status as an Employee or Consultant terminates as a result of
disability that is not total and permanent disability as defined in Section
22(e)(3) of the Code, to the extent permitted on the date of termination, the
Optionee must exercise an ISO within 90 days of such termination for the ISO to
be qualified as an ISO.
(c) Exercise of Nonstatutory Stock Option. There may be a regular
federal income tax liability and California income tax liability upon the
exercise of a Nonstatutory Stock Option. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee or a former Employee, the
Company will be required to withhold from Optionee's compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(d) Disposition of Shares. In the case of an NSO, if Shares are held
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal and California income tax
purposes. In the case of an ISO, if Shares transferred pursuant to the Option
are held for at least one year after exercise and are disposed of at least two
years after the Date of Grant, any gain realized on disposition of the Shares
will also be treated as long-term capital gain for federal and California income
tax purposes. If Shares purchased under an ISO are disposed of within such one-
year period or within two years after the Date of Grant, any gain realized on
such disposition will be treated as compensation income (taxable at ordinary
income rates) to the extent of the difference between the Exercise Price and the
lesser of (1) the Fair Market Value of the Shares on the date of exercise, or
(2) the sale price of the Shares.
(e) Notice of Disqualifying Disposition of ISO Shares. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
-6-
<PAGE>
N. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
O. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Board or committee shall be final and binding on the
Company and on Optionee.
P. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and
construed in accordance with the laws of the State of California excluding that
body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
Q. NOTICES. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
R. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
S. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by California law except for that body of
law pertaining to conflict of laws.
TELESENSORY CORPORATION
a California corporation
By: ____________________________________
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<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: _______________________________________
Optionee
Residence Address:
Telephone: ____________________________
Social Security No. ___________________
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<PAGE>
EXHIBIT A
---------
1995 STOCK PLAN
EXERCISE NOTICE
TeleSensory Corporation
455 North Bernardo Avenue
Mountain View, CA 94039-7455
Attention: Secretary
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of TeleSensory Corporation
(the "Company") under and pursuant to the ( ) 1993 Executive Stock Plan or
( ) 1995 Stock Plan (the "Plan") and the [ ] Incentive [ ] Nonstatutory Stock
Option Agreement dated ________, 19___ (the "Option Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
3. Rights as Shareholder. Until the stock certificate evidencing such
---------------------
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 12 of the Plan.
Optionee shall enjoy rights as a shareholder until such time as
Optionee disposes of the Shares or the Company and/or its assignee(s) exercises
the Right of First Refusal hereunder. Upon such exercise, Optionee shall have
no further rights as a holder of the Shares so purchased except the right to
receive payment for the Shares so purchased in accordance with the provisions of
this Agreement, and Optionee shall forthwith cause the certificate(s) evidencing
the Shares so purchased to be surrendered to the Company for transfer or
cancellation.
4. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
<PAGE>
5. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
full Exercise Price for the Shares.
6. Entire Agreement. The Plan and Notice of Grant/Option Agreement are
----------------
incorporated herein by reference. This Agreement, the Plan, the Option
Agreement and the Investment Representation Statement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and
Purchaser with respect to the subject matter hereof, and may not be modified
adversely to the Purchaser's interest except by means of a writing signed by the
Company and Purchaser.
Submitted by: Accepted by:
OPTIONEE: TeleSensory Corporation
By: __________________________
Its: _________________________
(Signature)
Address: Address:
- ------- -------
___________________________ 455 North Bernardo Avenue
Mountain View, CA 94039-7455
___________________________
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : TELESENSORY CORPORATION
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of
California and any other legend required under applicable state securities laws.
<PAGE>
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer qualifies under Rule
701 at the time of the grant of the Option to the Optionee, the exercise will be
exempt from registration under the Securities Act. In the event the Company
becomes subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer
period as any market stand-off agreement may require) the Securities exempt
under Rule 701 may be resold, subject to the satisfaction of certain of the
conditions specified by Rule 144, including: (1) the resale being made through a
broker in an unsolicited "broker's transaction" or in transactions directly with
a market maker (as said term is defined under the Securities Exchange Act of
1934); and, in the case of an affiliate, (2) the availability of certain public
information about the Company, (3) the amount of Securities being sold during
any three month period not exceeding the limitations specified in Rule 144(e),
and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than three years, the satisfaction of the conditions set forth
in sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any securities of the Company under the Securities Act, Optionee
shall not sell or otherwise transfer any Shares or other securities of the
Company during the 180-day period following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however, that
such restriction shall only apply to the first registration statement of the
Company to become effective under the Securities Act which include securities to
be sold on behalf of the Company to the public in an underwritten public
offering under the Securities Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such 180-day period.
(e) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
-2-
<PAGE>
Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.
(f) Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities without the consent of the Commissioner of Corporations of
California. Optionee has read the applicable Commissioner's Rules with respect
to such restriction, a copy of which is attached.
Signature of Optionee:
_____________________________________________
Date:________________, 19__
-3-
<PAGE>
EXHIBIT 10.5
TELESENSORY CORPORATION
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("AGREEMENT") is entered into as of the ___
day of __________, 199__ by and between Telesensory Corporation, a California
corporation (the "COMPANY") and [__________________] ("INDEMNITEE").
RECITALS
--------
A. The Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance.
B. The Company and Indemnitee further recognize the substantial increase
in corporate litigation in general, subjecting directors, officers, employees,
agents and fiduciaries to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available as adequate
under the present circumstances, and Indemnitee and other directors, officers,
employees, agents and fiduciaries of the Company may not be willing to continue
to serve in such capacities without additional protection.
D. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitees to the maximum extent permitted by law.
E. In view of the considerations set forth above, the Company desires that
Indemnitee be indemnified by the Company as set forth herein.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall indemnify to the
---------------------------
fullest extent permitted by law if Indemnitee was or is or becomes a party to or
witness or other participant in, or are threatened to be made a party to or
witness or other participant in, any threatened, pending or completed action,
suit, proceeding or alternative dispute resolution mechanism, or any hearing,
inquiry or investigation that Indemnitee in good faith believe might lead to the
institution of any
<PAGE>
such action, suit, proceeding or alternative dispute resolution mechanism,
whether civil, criminal, administrative, investigative or other (hereinafter a
"CLAIM") by reason of (or arising in part out of) any event or occurrence
related to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or any subsidiary of the Company, or is or
was serving at the request of the Company as a director, officer, employee,
agent or fiduciary of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action or inaction on the part of
Indemnitee while serving in such capacity (hereinafter an "INDEMNIFIABLE EVENT")
against any and all expenses (including attorneys' fees and all other costs,
expenses and obligations incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in or participate in, any such action, suit, proceeding,
alternative dispute resolution mechanism, hearing, inquiry or investigation),
judgments, fines, penalties and amounts paid in settlement (if such settlement
is approved in advance by the Company, which approval shall not be unreasonably
withheld) of such Claim and any federal, state, local or foreign taxes imposed
on Indemnitees as a result of the actual or deemed receipt of any payments under
this Agreement (collectively, hereinafter "EXPENSES"), including all interest,
assessments and other charges paid or payable in connection with or in respect
of such Expenses. Such payment of Expenses shall be made by the Company as soon
as practicable but in any event no later than twenty days after written demand
by Indemnitees therefor is presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligations of the Company under Section 1(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "EXPENSE ADVANCE") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agree to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commence legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). The Indemnitee's obligation to reimburse the Company for
any Expense Advance shall be unsecured and no interest shall be charged thereon.
If there has not been a Change in Control (as defined in Section 10(c) hereof),
the Reviewing Party shall be selected by the Board of Directors, and if there
has been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section 1(c) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law,
-2-
<PAGE>
Indemnitee shall have the right to commence litigation seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change
-----------------
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then, with respect to all matters
thereafter arising concerning the rights of Indemnitees to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Articles of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel (as defined in Section 10(d) hereof) shall be selected
by Indemnitees and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to fully
indemnify such counsel against any and all expenses (including attorneys' fees),
claims, liabilities and damages arising out of or relating to this Agreement or
its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section (1)(a)
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all Expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than
twenty days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
-3-
<PAGE>
(c) No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
----
contendere, or its equivalent, shall not create a presumption that Indemnitee
- ----------
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of Indemnitee, all amounts payable as a result of such action, suit,
proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to pay the Expenses of any Claim, the Company shall be
entitled to assume the defense of such Claim with counsel approved by
Indemnitee, which approval shall not be unreasonably withheld, upon the delivery
to Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same Claim; provided that, (i) Indemnitee shall have the right to
employ Indemnitee's counsel in any such Claim at Indemnitee's expense and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there is a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (C) the Company shall not continue to retain such counsel to
defend such Claim, then the fees and expenses of Indemnitee's counsel shall be
at the expense of the Company. The Company shall have the right to conduct such
defense as it sees fit in its sole discretion, including the right to settle any
claim against Indemnitee without the consent of the Indemnitee.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
-4-
<PAGE>
(a) Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by the other provisions of this Agreement, the
Company's Articles of Incorporation, the Company's Bylaws or by statute. In the
event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a California corporation to indemnify
a member of its Board of Directors or an officer, employee, agent or fiduciary,
it is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
California corporation to indemnify a member of its Board of Directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 8(a) hereof.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall be in addition to any rights to which Indemnitee may be entitled under the
Company's Articles of Incorporation, its Bylaws, any agreement, any vote of
shareholders or disinterested directors, the General Corporation Law of the
State of California, or otherwise. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action Indemnitee took or did
not take while serving in an indemnified capacity even though Indemnitee may
have ceased to serve in such capacity.
4. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Articles of Incorporation, Bylaw or otherwise) of
the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Liability Insurance. The Company shall, from time to time, make the
-------------------
good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable insurance
companies providing the officers and directors of the Company with coverage for
losses from wrongful acts, or to ensure the Company's performance of
-5-
<PAGE>
its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
directors' and officers' liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for
----------------------------
Expenses resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or applicable
law;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Articles of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 317 of the California General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of
-6-
<PAGE>
accrual of such cause of action, and any claim or cause of action of the Company
shall be extinguished and deemed released unless asserted by the timely filing
of a legal action within such two-year period; provided, however, that if any
-------- -------
shorter period of limitations is otherwise applicable to any such cause of
action, such shorter period shall govern.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee, agent or fiduciary of the Company
which imposes duties on, or involves services by, such director, officer,
employee, agent or fiduciary with respect to an employee benefit plan, its
participants or its beneficiaries; and if Indemnitee acted in good faith and in
a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if, on or after the date of this Agreement, (i) any
------------------------------------------
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in such
capacity or a corporation owned directly or indirectly by the shareholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing more
than 50% of the total voting power represented by the Company's then outstanding
---
Voting Securities, (ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board of Directors of the
Company and any new director whose election by the Board of Directors or
nomination for election by the Company's shareholders was approved by a vote of
at least two thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other
-7-
<PAGE>
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
shareholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of related transactions) all or substantially all of the
Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitees within the last three years (other than
with respect to matters concerning the rights of Indemnitees under this
Agreement, or of other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee are
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean
any securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect with respect to Claims relating to Indemnifiable Events
regardless of whether Indemnitee continues to serve as a director, officer,
employee, agent or fiduciary of the Company or of any other enterprise at the
Company's request.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action,
-8-
<PAGE>
unless, as a part of such action, a court of competent jurisdiction over such
action determines that each of the material assertions made by Indemnitee as a
basis for such action was not made in good faith or was frivolous. In the event
of an action instituted by or in the name of the Company under this Agreement to
enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all Expenses incurred by Indemnitee in defense of such
action (including costs and expenses incurred with respect to Indemnitee's
counterclaims and cross-claims made in such action), and shall be entitled to
the advancement of Expenses with respect to such action, unless, as a part of
such action, a court having jurisdiction over such action determines that each
of Indemnitee's material defenses to such action was made in bad faith or was
frivolous.
14. Notice. All notices and other communications required or permitted
------
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given (a) five (5) days after deposit with the U.S. Postal
Service or other applicable postal service, if delivered by first class mail,
postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day
after the business day of deposit with Federal Express or similar overnight
courier, freight prepaid, or (d) one day after the business day of delivery by
facsimile transmission, if delivered by facsimile transmission, with copy by
first class mail, postage prepaid, and shall be addressed if to Indemnitee, at
the Indemnitee's address as set forth beneath Indemnitee's signature to this
Agreement and if to the Company at the address of its principal corporate
offices (attention: Secretary) or at such other address as such party may
designate by ten days' advance written notice to the other party hereto.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Superior
Court of the State of California in and for Santa Clara County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed and enforced in accordance with the laws of the State of California,
as applied to contracts between California residents, entered into and to be
performed entirely within the State of California, without regard to the
conflict of laws principles thereof.
-9-
<PAGE>
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
TELESENSORY CORPORATION
a California corporation
By: _______________________________________
Larry Israel, President
Address: 455 North Bernardo Avenue
Mountain View, CA 94039
AGREED TO AND ACCEPTED BY:
Address:
-10-
<PAGE>
EXHIBIT 10.12
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made this 9th day of
April, 1995 by and among James C. Bliss and Carolyn Joan Bliss, Trustees of the
James C. Bliss and Carolyn Joan Bliss Trust u/d/t dated October 11, 1979, Judith
Bliss and John Bliss (collectively, the "Sellers") and Telesensory Corporation,
a California corporation (the "Company") and the individuals or entities listed
on Exhibit A attached hereto (collectively, the "Purchasers").
A. The Sellers are the record and beneficial owners of 511,952 shares (the
"Shares") of the Common Stock of Telesensory Corporation (the "Company").
B. The Sellers desire to sell the Shares to the Purchasers and the
Purchasers desire to buy the Shares from the Sellers in accordance with the
terms and conditions hereof.
THEREFORE, the parties agree as follows:
1. SALE OF THE SHARES. The Sellers hereby agree to sell and the
------------------
Purchasers hereby agree to purchase the Shares for an aggregate purchase price
of $1,535,856.
2. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares shall be
-------------------------
paid by delivery to the Sellers at the Closing (defined below) of a check or
checks in the aggregate amount of $1,535,856 (or solely in the case of
Mr. Jesse, a promissory note in the form attached hereto). * hand written
language
3. CLOSING. The purchase and sale of the Shares (the "Closing") will be
-------
consummated on or before April 17, 1995 at the offices of Wilson, Sonsini,
Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto,
California 94306. At the Closing, the Sellers will deliver to the Purchasers
all stock certificates representing the Shares to be sold to the Purchasers,
together with duly endorsed assignments to the Purchasers and such other
instruments and documents as the Purchasers may reasonably request in connection
with the transfer of the Shares.
4. SELLERS REPRESENTATIONS AND WARRANTIES. The Sellers, jointly and
--------------------------------------
severally, represent and warrant to the Purchasers the following with respect to
the Shares:
4.1 AUTHORITY. Each Seller has all requisite power and authority to
---------
execute, deliver and perform this Agreement. This Agreement has been duly
executed and delivered by each Seller and constitutes a valid, binding and
enforceable obligation of each Seller, except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and subject to rules of law governing specific
performance, injunctive relief and other equitable remedies.
4.2 RIGHT TO TRANSFER SHARES. Each Seller has full power and
------------------------
authority to sell and transfer the Shares held by such Seller without the
consent or approval of any other person or authority and has and will transfer
to the Purchasers at the Closing good and marketable title to such Shares, free
of restrictions or adverse claims or interests.
<PAGE>
4.3 NO LEGAL, TAX OR INVESTMENT ADVICE. Each Seller understands that
----------------------------------
nothing in this Agreement or any other materials presented to the Sellers in
connection with the purchase and sale of the Shares constitutes legal, tax or
investment advice. Each Seller has consulted such legal, tax and investment
advisors as he or she, in his or her sole discretion, has deemed necessary or
appropriate in connection with his or her sale of the Shares.
4.4 ACCESS TO DATA. Each Seller has had an opportunity to discuss the
--------------
Company's business, management and financial affairs with the Company's
management and has also had an opportunity to ask questions of the Company's
officers, which questions were answered to each Seller's satisfaction.
4.5 COMPLIANCE WITH LAW. The purchase and sale of the Shares will not
-------------------
conflict with or result in any violation of any federal or state statute, law,
ordinance, rule or regulation applicable to the Sellers.
5. PURCHASERS' REPRESENTATIONS AND WARRANTIES. The Purchasers, jointly
------------------------------------------
and severally, represent and warrant to the Sellers the following with respect
to the Shares:
5.1 AUTHORITY. Each Purchaser has all requisite power and authority
---------
to execute, deliver and perform this Agreement. This Agreement has been duly
executed and delivered by each Purchaser and constitutes a valid, binding and
enforceable obligation of each Purchaser, except as enforcement may be limited
by bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and subject to rules of law governing specific
performance, injunctive relief and other equitable remedies.
5.2 NO LEGAL, TAX OR INVESTMENT ADVICE. Each Purchaser understands
----------------------------------
that nothing in this Agreement or any other materials presented to the
Purchasers in connection with the purchase and sale of the Shares constitutes
legal, tax or investment advice. Each Purchaser has consulted such legal, tax
and investment advisors as it, in its sole discretion, has deemed necessary or
appropriate in connection with its purchase of the Shares.
5.3 ACCESS TO DATA. Each Purchaser has had an opportunity to discuss
--------------
the Company's business, management and financial affairs with the Company's
management and has also had an opportunity to ask questions of the Company's
officers, which questions were answered to each Purchaser's satisfaction.
6. THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The Company represents
--------------------------------------------
and warrant to the Sellers as follows:
6.1 NO OTHER TRANSACTIONS. The Company is not a party to any
---------------------
agreement providing for, nor has the Company entered into any negotiations with
any third party involving, (i) the sale of all or substantially all of the
assets of the Company or a merger of the Company with or into another
corporation; (ii) the acquisition of all or substantially all of the assets of
any business or
<PAGE>
any corporation, partnership interest, association or other business
organization or division thereof, by merger, consolidation or in any other
manner; (iii) a registered public offering involving an underwriting.
6.2 COMPLIANCE WITH LAW. The purchase and sale of the Shares will not
-------------------
conflict with or result in any violation of any federal or state statute, law,
ordinance, rule or regulation applicable to the Company, including Section 500
of the California General Corporation Law.
7. DISCLOSURE.
----------
7.1 BY PURCHASERS. The Purchasers have fully provided, or have caused
-------------
to be provided to, each Seller all the information which such Seller has
requested for deciding whether to sell the Shares and all information which the
Purchasers, after due inquiry, believe is reasonably necessary to enable such
Seller to make such decision. Neither this Agreement nor any other statements
or certificates made or delivered in connection herewith, taken as a whole,
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading.
7.2 BY SELLERS. Each Seller has fully provided, or has caused to be
----------
provided to, each Purchaser all the information which such Purchaser has
requested for deciding whether to buy the Shares and all information which each
Seller, after due inquiry, believes is reasonably necessary to enable such
Purchaser to make such decision. Neither this Agreement nor any other
statements or certificates made or delivered in connection herewith, taken as a
whole, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements herein or therein not misleading.
8. GENERAL PROVISIONS
------------------
8.1 INDEMNIFICATION. The Company hereby indemnifies and agrees to
---------------
hold harmless the Sellers, and each of them, in respect of any claims, costs,
demands, liabilities, losses and expenses (including, without limitation,
reasonable legal expenses) incurred or suffered by the Sellers, and each of
them, arising out of or in connection with any action or proceeding in a court
of law in which any of the Sellers are named as a defendant brought by a
shareholder of the Company directly arising out of the transaction contemplated
by this Agreement.
8.2 EXPENSES. All costs and expenses incurred in connection with this
--------
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expense, including fees and expenses of any broker or finder.
The Sellers, jointly and severally agree to indemnify and save the Purchasers,
and each of them, harmless from any claim or demand for commission or other
<PAGE>
compensation by any broker, finder, agent or similar intermediary claiming to
have been employed by or on behalf of any of the Sellers and any expenses
incurred in defending against any such claim. The Purchasers, jointly and
severally agree to indemnify and save the Sellers, and each of them, harmless
from any claim or demand for commission or other compensation by any broker,
finder, agent or similar intermediary claiming to have been employed by or on
behalf of any of the Purchasers and any expenses incurred in defending against
any such claim.
8.3 AMENDMENT; WAIVER. This Agreement may be amended by the parties
-----------------
hereto at any time only by an instrument in writing signed on behalf of each of
the parties hereto. Any waiver of a right under this Agreement must be in
writing and signed by the waiving party. Any amendment or waiver by the Sellers
must be signed by each Seller and any amendment or waiver by the Purchasers must
be signed by each Purchaser.
8.4 COUNTERPARTS. This Agreement may be executed in counterparts,
------------
each of which shall be considered one and the same agreement.
8.5 GENERAL. This Agreement (including the documents and instruments
-------
referred to herein) (i) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof and (ii) is not intended, and shall
not be construed, to confer upon any person other than the parties hereto any
rights or remedies hereunder. The headings contained in this Agreement are for
reference only and shall not affect the meaning of any Section. If any
provision of this Agreement is held to be unenforceable, that shall not affect
the enforceability of the remainder of this Agreement or of that provision in
different circumstances.
8.6 GOVERNING LAW. This Agreement shall be construed, governed and
-------------
enforced in accordance with the laws of the State of California.
9. CONFIDENTIALITY. The existence and terms of this Agreement shall be
---------------
kept strictly confidential and shall not be disclosed directly or indirectly to
a third party other than (i) to an attorney or accountant for a party to this
Agreement who agrees to keep the existence and terms of this Agreement
confidential, (ii) to an agent of a party to this Agreement who has a need to
know such information and who agrees to keep such information strictly
confidential, or (iii) to a governmental entity if such disclosure is required,
the other party is given reasonable notice of the proposed disclosure, and the
party which is required to make such disclosure uses its best efforts to obtain
an order protecting the confidentiality of this Agreement.
SELLERS:
James C. and Carolyn Joan Bliss,
Trustees of the James C. Bliss and
Carolyn Joan Bliss Trust u/d/t dated
October 11, 1979
<PAGE>
Judith Bliss
/s/ Judith Bliss
John Bliss
/s/ John W. Bliss
PURCHASERS:
________________________________________
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Name Number of Shares Purchase Price
<S> <C> <C>
Telesensory Corporation 345,285 $1,035,855
455 North Bernardo Avenue
Mountain View, CA 94039-7455
Larry Israel, via an IRA of 66,667 $ 200,001
which he is the beneficiary
455 North Bernardo Avenue
Mountain View, CA 94039-7455
Atherton Ventures 8,334 $ 25,002
c/o Mario M. Rosati
650 Page Mill Road
Palo Alto, CA 94304
WS Investments 7,500 $ 22,500
650 Page Mill Road
Palo Alto, CA 94304
Mario M. Rosati 833 $ 2,499
650 Page Mill Road
Palo Alto, CA 94304
H. William Jesse 50,000 $ 150,000
H.W. Jesse & Co.
222 Sutter St., 8th Floor
San Francisco, CA 94108
The Individual's Venture 33,333 $ 99,999
Fund (1994) L.P.
Roger Barry
87 Crescent Drive
Palo Alto, CA 94301
Total: 511,952 $1,535,856
</TABLE>
<PAGE>
EXHIBIT 10.17
DATED March 29, 1996
SERVICE AGREEMENT
BEGINMANAGE LIMITED (1)
JOHN TILLISCH (2)
Ref: 375/11/T9765.1/VC:44081.13/szm
SJ BERWIN & CO
222 Grays Inn Road
London WC1X 8HB
Telephone 0171-837-2222
Facsimile 0171-833-2860
DX 255 London
<PAGE>
DATE
March 29, 1996
PARTIES
(1) BEGINMANAGE LIMITED (no 3161060) (in the process of changing its name to
Sensory Systems Limited) whose registered office is at 1 Watling Gate, 297-
303 Edgeware Road, London NW9 6NB ("the Company"); and
(2) JOHN TILLISCH of 6 Myddelton Park, London N20 OHX ("the Employee").
INTERPRETATION
(3) In this Agreement, unless the context otherwise requires, the following
expressions have the meanings set out below:
the Appointment the employment of the Employee pursuant to
this Agreement;
the Auditors the Auditors for the time being of the
Company;
the Board the board of directors of the Company for the
time being (including any duly authorised
committee of the Board);
the Commencement Date the date hereof, or as soon hereafter as the
Company acquires the assets or business
formerly owned by Sensory Systems Limited;
Confidential Information all information which may be imparted in
confidence or be of a confidential nature
relating to the business or prospective
business, plans or internal affairs of the
Company or any Group Company and in
particular all Know-how, Marketing
Information, trade secrets, unpublished
information relating to the Company's or any
Group Company's intellectual property and any
other commercial, financial or technical
information relating to the business of the
Company or any Group Company or to any
customer or supplier, officer or employee of
the Company or Group Company or to any member
or person
<PAGE>
interested in the share capital of the
Company or any Group Company;
Documents documents, disks, memory, notebooks, tapes or
any other medium, whether or not eye-
readable, on which information may from time
to time be recorded;
the EPCA the Employment Protection (Consolidation) Act
1978;
Group Company any company which is a subsidiary or
subsidiary undertaking of the Company or a
holding company or parent undertaking of the
Company or a subsidiary or subsidiary
undertaking of any such holding company or
parent undertaking, and references to the
"Group Companies" shall be construed
accordingly;
Holding Company TeleSensory Corporation, a company
incorporated in the State of California whose
principal office is 455 Bernardo, Mountain
View, CA 94043;
Initial Period the period referred to in clause 2.1;
Know-how information (including without limitation
that comprised in formulae, specifications,
designs, drawings, component lists,
databases, software (or pre-cursor
documents), databases, manuals, instructions
and catalogues) held in whatever form
relating to the creation, production or
supply of any products or services by the
Company or any Group Company, or by or to any
of the suppliers, customer, partners or joint
venturers of such company;
Marketing Information information relating to the marketing or
sales or any products or services of the
Company or any Group Company, including lists
of customers' and suppliers' names, addresses
and contacts, sales targets and statistics,
market share and pricing statistics,
marketing surveys, research and reports and
advertising and promotional material;
Permanently Disabled physical or mental incapacity of the Employee
either total or partial, such that the
Employee is unable to perform his duties;
-3-
<PAGE>
Permitted Interest an interest in any class of shares or other
securities of any company which are traded on
a recognised investment exchange which amount
to not more than 5% of such class of issued
shares or securities and an interest in any
units of any authorised unit trust or
interest as described in clause 8.4 of this
Agreement;
Pre-tax Profits the operating profit or loss on ordinary
trading activities before taxation (according
to the historical cost accounting rules)
disclosed by the aggregated consolidated
audited profit and loss account of the
Company and Teletec for the relevant
financial year; subject (for the purposes
only of determining the amount payable under
clause 4.1(b) and Schedule 2) to such
adjustments as shall be necessary to reflect
the following:
(a) the purchase price for goods supplied
by TSC (from USA and elsewhere) shall
be comparable to charges for such goods
by TSC to independent distributors in
Europe purchasing under similar
circumstances, conditions and
quantities from time to time;
(b) before deducting any payment to TSC in
respect of know how, goodwill and other
intangible assets;
(c) before any deduction for USA head
office or similar management charges;
(d) before any charge for interest or
finance by TSC in regard to the
purchase price of business;
(e) before payment of any bonus to the
Employee pursuant to this Agreement;
and
(f) before any deduction for payments made
to the Employee pursuant to a
Noncompetition Agreement made among
VTEK, Inc., TeleSensory Corporation and
the Employee on or about the date of
this Agreement;
Purchase Agreement the agreement for the purchase of the assets
of Sensory Systems Limited between VTEK,
Inc., TeleSensory Corporation, the Company
and the Employee;
-4-
<PAGE>
TSC TeleSensory Corporation of 455 North Bernardo
Avenue, Mountain View, California 94039-7455
and/or its associated companies from time to
time;
Teletec Teletec Sarl, a French company incorporated
in Paris, France, with its principal office
at 18 passage de Petites Ecuries 75010 Paris,
France; and
Termination Date the date of termination or expiration of the
Appointment howsoever occurring.
(2) The expressions "subsidiary" and "holding company" have the meanings given
to them by Sections 736 and 736A of the Companies Act 1985; the expressions
"parent undertaking" and "subsidiary undertaking" have the meanings given
to them by Sections 258, 259 and 260 of the Companies Act 1985; and the
expression "financial year" has the meaning given by Section 223 of the
Companies Act 1985.
(3) The provisions of Sections 324 and 328 of the Companies Act 1985 apply in
determining for the purpose of clause 8 whether the Employee has an
interest in any shares or other securities.
(4) References to clauses, Parties, and the Schedules are respectively to
clauses of and the Parties and the Schedules to this Agreement.
(5) References to any enactment are to be construed as referring also to any
enactment or re-enactment thereof (whether before or after the date
hereof), and to any previous enactment which such enactment has replaced
(with or without amendment provided that the amendment does not change the
law as at the date hereof) and to any regulation or order made thereunder.
(6) References to the giving of notice of termination or to any rights or
obligations during any period of notice shall include any implied or
express rights of the Parties to give notice of termination during any
continuation of the Appointment after the end of the limited Period.
OPERATIVE PROVISIONS
1 JOB TITLE
The Company shall employ the Employee and the Employee shall serve the
Company initially as the managing director and the Company shall
immediately following the Commencement Date procure that the Employee is
appointed as a director of the Company provided that the engagement of the
Employee as managing director shall not be a term of his employment giving
a right to claim constructive dismissal or damages or any other remedy if
he is removed as a director or as managing director. THE COMPANY AGREES,
HOWEVER, THAT ANY SUCH REMOVAL SHALL NOT BE MADE ARBITRARILY OR
CAPRICIOUSLY.
-5-
<PAGE>
2 PERIOD OF EMPLOYMENT
2.1 The Appointment shall be deemed to have commenced on the Commencement Date
and, unless terminated earlier under clause 11, will continue until the
third anniversary thereof ("the Initial Period").
2.2 The Company (and any relevant Group Company) shall not be obliged to
provide work to the Employee at any time after notice of termination of the
Appointment shall have been given hereunder by either Party and the Company
may, in its discretion, take any one or more of the following steps in
respect of all or part of an unexpired period of notice upon its
continuation beyond the Initial Period:
(a) require the Employee to comply with such conditions as it may specify
in relation to attending at, or remaining away from, the place(s) of
business of the Company and the Group Companies;
(b) assign the Employee to other duties reasonably consistent with his
status as a senior manager; or
(c) withdraw any powers vested in, or duties assigned to, the Employee.
2.3 If the Employee fails to make himself available to work during any period
of notice of termination of the Appointment given by either Party hereunder
other than at the request or with the permission of the Board, the Company
reserves the right to deduct one day's salary for each day of absence
during such notice period.
2.4 If during the Appointment the Employee shall be removed from his office as
a director of the Company pursuant to any power in that behalf given to the
Board or to the members of the Company by law or by the Articles of
Association of the Company, or if he shall retire from his office as a
director of the Company by rotation and shall not be re-elected, such event
will not be deemed to be a breach of this Agreement, the payments to the
Employee under clause 4 will continue and the job title of the Employee may
be altered appropriately.
2.5 If during the Appointment the Employee shall die or become Permanently
Disabled (subject to a consecutive 90 day, or cumulative 120 day, period as
stated at clause 10.2) the Employee shall be entitled to receive such
payment as is stated at clause 4.1(b) (based on earnings as if the Employee
had continued to work throughout the Appointment) for a number of months
equal to the number of months elapsed since the Commencement Date.
3 DUTIES
3.1 During the term of the Appointment, the Employee shall have the following
duties and obligations:
-6-
<PAGE>
(a) direct supervision of the Company and of Teletec, liaison between the
Group Companies, marketing support and such other similar advisory
functions as the Board may reasonably require as is reasonably
consistent with his status as a senior manager;
(b) general responsibility for the Group Companies' sales and marketing
activities in Europe and any other territories or in such other
capacity as the Board may reasonably require;
(c) at all times to use all reasonable endeavours to promote the interests
and welfare and maintain the goodwill of the Company and any other
Group Company and not to do and to exercise all reasonable endeavours
to prevent there being done anything which may be prejudicial or
detrimental to the Company or any Group Company;
(d) faithfully and diligently to perform his duties and to exercise and
carry out such powers and functions reasonably consistent with his
status as a senior manager as may from time to time be vested in him
by or under the authority of the Board;
(e) to devote the whole of his time and attention and the full benefit of
his knowledge, expertise and skills in the proper performance of his
duties (unless on holiday as permitted by this Agreement or prevented
by ill-health or accident);
(f) to give (in writing if so requested) to the Board from time to time,
or to such person(s) as it may reasonably direct, such information and
explanations regarding the affairs of the Company or any other Group
Company or matters relating to the Appointment as the Board from time
to time may require; and
(g) to comply with the provisions of Schedule 3.
3.2 Subject to the provisions of clause 3.1, the Employee shall have general
control and management of, and full operational responsibility for, the
business and affairs of the Company and Teletec and shall have power to
appoint and dismiss employees, agents and consultants and to enter into any
contract on behalf of the Company and Teletec in the ordinary course of
business carried on by it and to do all such other acts and things in the
ordinary course of the business carried on by the Company and Teletec as
the Employee may consider necessary or conducive to the Company's and
Teletec's interests and the satisfactory operation of its business (with
such limits to the power to do so as may from time to time be prescribed by
or under the authority of the Board including the ability for the Board in
its discretion to remove any or all such powers from the Employee or
provide for them also to be exercised by any other person).
3.3 The Employee shall attend and work at the Company's location at Edgeware
Road, London as determined from time to time by the Board and shall travel
to and work at such places (whether within or outside the United Kingdom)
in the manner and on the occasions reasonably required from time to time by
the Board. If the Company's base of operations is relocated more than 50
miles from its present location in Edgeware Road, London, and if the
Employee agrees to move
-7-
<PAGE>
his base of work, he shall be entitled to be reimbursed for all relocation
expenses reasonably incurred by him.
3.4 The Board may require the Employee from time to time to perform services,
reasonably consistent with his status as a senior manager, temporarily for
any Group Company wherever situated and without further fees or
remuneration and to enter into any separate agreement(s) with such Group
Company for such purpose and any duties that he may have under this
Agreement will be deemed to extend to such Group Company.
3.5 The hours of work of the Employee are not fixed but are the usual working
hours of the Company and such additional hours as may be necessary to
enable him properly to discharge his duties.
3.6 The Company may at any time appoint another person or persons to act
jointly with the Employee in discharging his duties.
3.7 The Employee shall:
(a) at the request and expense of the Company, submit annually to a
medical examination by a medical practitioner nominated by the Company
as part of a health screening programme and for insurance purposes;
and
(b) authorise such medical practitioner to disclose to or discuss with the
Company's medical adviser any matters arising from such examination;
and the Company's medical adviser may notify the Chairman of the
Company of any serious matter if, in his opinion, it might materially
and adversely affect the health of the Employee or the proper
discharge of his duties.
4 PAY AND EXPENSES
4.1 The Company shall pay to the Employee for the proper performance of his
duties under this Agreement:
(a) a fixed salary at the rate of (Pounds)70,000 per annum for the first
year of the Appointment, increasing to (Pounds)73,000 per annum for
the second year of the Appointment and (Pounds)77,000 per annum for
the third year of the Appointment (or such higher rate as the Company
may from time to time notify in writing to the Employee) such
increases to take effect on the first and second anniversary
respectively of the Commencement Date; and
(b) a bonus of an amount equal to one third of the excess of Pre-tax
Profits over (Pounds)322,500 in respect of each of the financial years
ending 31 December 1996, 31 December 1997 and 31 December 1998 and up
to an aggregate total bonus payment of (Pounds)225,800 throughout the
Initial Period, payable in accordance with and subject to the terms of
Schedule 2.
-8-
<PAGE>
4.2 The fixed salary of the Employee will:
(a) accrue from day to day and be payable by equal monthly instalments in
arrears by not later than the last working day of each month;
(b) notwithstanding anything to the contrary contained in the Articles of
Association of the Company or of any other Group Company, be inclusive
of any other fees or remuneration of any description which the
Employee might be entitled to receive from the Company or any Group
Company or any other company or association in which he holds office
as a nominee or representative of the Company or any Group Company
(and the Employee shall, at the discretion of the Board, either waive
his right to any such remuneration or account to the Company for the
same forthwith upon receipt);
(c) be paid by credit transfer to the account nominated by the Employee
from time to time; and
(d) be capable of set off by the Company from time to time against any
liability of the Employee to the Company or any Group Company, other
than any liability arising on account of or in connection with the
indemnifications pursuant to the Purchase Agreement.
4.3 The Company shall pay the bonus as stated at clause 4.1(b) above on the
date following the calculation of the Pre-tax Profit in accordance with
Schedule 2.
4.4 The Company shall repay to the Employee all reasonable travelling, hotel
and other expenses properly incurred by him in or about the performance of
his duties, subject to the Employee having delivered to the Company such
form(s) and vouchers or other evidence of actual payment of such expenses
as the Company may from time to time reasonably require. The decision of
the Board as to what constitutes reasonable expenses shall be conclusive.
5 OTHER BENEFITS
5.1 Subject to the Employee holding and continuing to hold a full driving
licence, the Company shall provide to the Employee a motor car of a type to
be agreed between the Parties for use by him in accordance with the
Company's car policy in force from time to time and the Company shall pay
all the running expenses of such car as are reasonably incurred by the
Employee. The Employee may elect to receive equivalent remuneration in
place of a car, at such level as the Board shall reasonably determine.
5.2 The Company shall continue to provide and the Employee shall be entitled to
continue to participate in, any disability or permanent health insurance
scheme provided to the Employee during the period prior to the Commencement
Date.
-9-
<PAGE>
5.3 The Company shall continue to contribute to the personal and executive
pension plans nominated by the Employee in the same amounts as have been
contributed during the period prior to this Agreement.
5.4 Any benefits which may from time to time be provided by the Company or any
other Group Company to the Employee or his family which are not expressly
referred to in this Agreement shall be provided at the entire discretion of
the Company and, unless so agreed in writing, shall not form part of the
Employee's terms and conditions of employment.
5.5 Should the Employee's employment be terminated for whatever reason the
Company reserves the right:
(a) to make a cash allowance in lieu of the benefits to which the Employee
is entitled for any period of notice; or
(b) to make provision for the continuation of such benefits for that
period;
or partly the one and partly the other. The provision of benefits pursuant
to paragraph (b) above will cease immediately should the Employee commence
new employment at any time prior to the expiry of the notice period which
provides to him a commensurate level of such benefits.
5.6 The provision of benefits as stated in this clause 5 and the provision of
payment as stated at clause 4.1(b) of this Agreement may be abated by the
Parent Company during any period of temporary disability of the Employee
that continues for a consecutive period of more than 90 days or periods
aggregating more than 120 days in any period of 180 days, and the
aforementioned provision of benefits and payment shall not continue in the
event of the Employee's death or he becomes Permanently Disabled except as
otherwise stated herein.
6 HOLIDAY
6.1 In addition to the usual public and bank holidays, the Employee shall be
entitled to four weeks' paid holiday in each complete holiday year worked
(and pro rata for part of each holiday year worked) to be taken at such
time or times as shall be agreed by the Board.
6.2 The holiday year runs from 1 January each year to the following 31
December. Holiday entitlement in respect of 5 days may be carried forward
from one holiday year to the next and no money will be paid in lieu of any
such untaken holiday entitlement.
6.3 Upon termination of the Appointment, other than pursuant to clause 11.1,
the Employee's entitlement to holiday will be calculated on the basis of
one and two thirds days for each calendar month of service completed during
the holiday year in which termination occurs and payment in lieu of untaken
holiday entitlement may be made at the discretion of the Board.
-10-
<PAGE>
7 CONFIDENTIALITY
7.1 Neither during the continuance of the Appointment, other than in the proper
course of his duties and for the benefit of the Company, nor after the
Termination Date for any reason whatsoever, shall the Employee:
(a) use, disclose, or communicate to any person any Confidential
Information which he shall have come to know or have received or
obtained at any time (before or after the date of this Agreement) by
reason of or in connection with his service with the Company; or
(b) copy or reproduce in any form or by or on any media or device or allow
others access to or to copy or reproduce Documents containing or
referring to Confidential Information.
7.2 The Employee acknowledges that all Documents containing or referring to
Confidential Information at any time in his control or possession are and
shall at all times remain the absolute property of the Company and the
Employee undertakes, both during the Appointment and after the Termination
Date:
(a) to exercise due care and diligence to avoid any unauthorised
publication, disclosure or use of Confidential Information and any
Documents containing or referring to it;
(b) at the direction of the Board, to deliver up any Confidential
Information (including all copies of all Documents whether or not
lawfully made or obtained) or to delete Confidential Information from
any re-usable medium; and
(c) to do such things and sign such documents at the expense of the
Company as shall be reasonably necessary to give effect to this clause
and/or to provide evidence that it has been complied with.
7.3 The restrictions in clause 7.1:
(a) will not restrict the Employee from disclosing (but only to the proper
recipient) any Confidential Information which the Employee is required
to disclose by law or any order of the court or any relevant
regulatory body, provided that the Employee shall have given prior
written notice to the Company of the requirement and of the
information to be disclosed and allowed the Company an opportunity to
comment on the requirement before making the disclosure; and
(b) will not apply to Confidential Information which is or which comes
into the public domain otherwise than as a result of an unauthorised
disclosure by the Employee or any other person who owes the Company an
obligation of confidentiality in relation to the information
disclosed,
-11-
<PAGE>
(c) will not restrict the Employee from disclosing under obligations of
confidentiality (but only to the proper recipient) any Confidential
Information to professional advisers or to employees and officers of
Group Companies.
7.4 The Employee agrees that the restrictions set out in this clause 7 are
without prejudice to any other duties of confidentiality owed to the
Company whether express or implied and are to survive the termination of
the Appointment (howsoever arising).
8 RESTRICTIONS DURING EMPLOYMENT
8.1 The Employee represents and confirms that he has procured the resignation
of his nominee director of, and has himself ceased to act as a shadow
director of, PDI (UK) Limited and such resignation has become effective and
he does not hold office in any company, trade or business other than
Sensory Systems Limited (No. 1987141).
8.2 Save as permitted under clause 8.4, the Employee shall not without the
prior written consent of the Board during the Appointment carry on or be
concerned, engaged or interested directly or indirectly (whether as
principal, shareholder, partner, employee, officer, agent or otherwise) in
any trade or business other than that of the Company and shall not engage
in any other activity which the Company reasonably considers may impair his
ability to perform his duties under this Agreement.
8.3 The Employee shall take such steps as are necessary to liquidate or
otherwise dispose of his interest within three months after the
Commencement Date in:
(a) PDI (UK) Limited; and
(b) any interest in any trade or business other than that of the Company,
which are not Permitted Interests, and which in the reasonable opinion
of the Board is in competition with the Company.
If such liquidation or disposal is considered by the Employee to be
impossible or undesirable for any reason, the Employee shall advise the
Board immediately and shall cooperate with the Board in order to endeavour
to resolve the conflict arising in a manner satisfactory to the Board.
8.4 The Employee may:
(a) hold a Permitted Interest; and/or
(b) carry on or be concerned, engaged or interested in any other trade or
business if he shall have:
(i) provided, on the basis of the utmost good faith, full particulars
of its nature and of the likely demands it will make on his time
and abilities;
-12-
<PAGE>
(ii) obtained the prior written consent of the Board (such consent not
to be unreasonably withheld), which consent may be given subject
to such terms or conditions as it may decide (each of which shall
be considered to be a term of this Agreement) but which shall not
prevent the Employee from taking the benefit of any business
rollover relief: the Company shall have the right to reconsider
the consent or the terms if it reasonably considers that it is in
the interests of the Company to do so; and
(c) for the avoidance of doubt, continue to own and be a director of
Sensory Systems Limited, provided such interest and involvement does
not otherwise amount to a breach of any obligation on or duty of
Employee.
8.5 The Employee shall not during the Appointment (save in a purely social
capacity or with the prior written consent of the Board or in relation to a
Permitted Interest) make any contact, whether formal or informal, written
or oral, with any of the Company's past, current or prospective suppliers,
customers or clients with whom the Employee has had business dealings
(directly or indirectly) for any purpose (including but not limited to an
intention to set up a competing business) other than for the legitimate
business interests of the Company.
8.6 The Employee shall not during the Appointment either on his own behalf or
on behalf of any person, firm or company:
(a) solicit or endeavour to entice away from the Company an actual
employee, or discourage from being employed by the Company any person
who, to the knowledge of the Employee, is an employee or a prospective
employee of the Company; or
(b) employ or procure another person to employ any such person.
8.7 The restrictions set out in this clause 8 are without prejudice to any
other fiduciary duties owed to the Company whether express or implied.
9 RELEVANT DEFINITIONS
9.1 For the purposes of the restrictions set out in clauses 7 and 8:
(a) the expression "Company" shall include any former owner or transferor
of a business acquired by the Company by which the Employee shall have
been employed under a contract of employment in respect of which his
service is include for the purposes of calculating continuous
employment with the Company;
(b) any reference to the Company and to the Company's trade or business
shall be deemed to include any Group Company and its trade or business
and/or to apply to them as if the words were repeated by reference to
such company insofar as the Employee shall have been performing
services for a period of not less than three months for such Group
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Company at any time during the period of 12 months prior to the
Termination Date and the Employee hereby undertakes to execute any
further documents which the Company may reasonably require to confirm
this at the Company's expense; and
(c) where references to the Company and Company's trade or business are
deemed to include and/or apply to a Group Company and to a Group
Company's business pursuant to paragraph (b) of this clause 9.2, the
Employee covenants with the Company for itself and in the same terms
in relation to each such Group Company and each Group Company's
business as he does with the Company and in respect of the Company's
business.
10 ABSENCE, ILLNESS AND INCAPACITY
10.1 If at any time the Employee is prevented by reason of ill-health, accident
or other incapacity from properly performing his duties he shall promptly
furnish to the Company, if required, evidence of such incapacity in a form
satisfactory to the Board.
10.2 The Company shall pay the Employee his fixed salary (less an amount equal
to his statutory sick pay) for the first consecutive period of 90 days or
120 days if longer in aggregate in any calendar year of absence due to
illness or other incapacity, but shall not be required to pay the Employee
any salary or other remuneration for any further periods of such absence in
any calendar year, although it may at its discretion do so.
11 TERMINATION
11.1 The Company may at any time terminate the Appointment with immediate effect
(or by such longer period of notice as the Company shall see fit) by giving
the Employee written notice in any of the following events:
(a) if the Employee at the time the notice is given is prevented by reason
of ill-health or accident or other incapacity from properly performing
his duties and has been so prevented (whether by the same or another
reason) for at least a continuous period of 90 days or for an
aggregate period of at least 120 days (whether or not, in either case,
working days) in the preceding 12 months (provided that any
termination pursuant to this clause 11.1(a) shall be without prejudice
to the payment due pursuant to clause 2.5);
(b) if the Employee shall have:
(i) neglected or failed or unreasonably refused to carry out any of
his duties hereunder or otherwise as a director of the Company or
any Group Company;
(ii) committed any material breach or non-observance or, after having
been given warning in writing, any repeated or continued breach
or non-observance of any of his duties or any of his express or
implied obligations arising from the Appointment or otherwise as
a director of the Company or Group Company
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including refusing to comply with any lawful instructions given
to him by the Board;
(iii) been guilty of conduct or permitted or suffered events which
bring himself, the Company or any Group Company into disrepute;
(iv) become prevented by an applicable law or regulation from
continuing as a director of the Company or performing any of
his duties;
(v) committed any act of fraud or dishonesty (whether or not
connected with the Appointment) or committed any act which, in
the reasonable opinion of the Board, adversely affects his
ability properly to carry out his duties;
(vi) been adjudged bankrupt, claimed the benefit of any Act for the
time being in force for the relief of insolvent debtors or
proposed or made any arrangement or composition with his
creditors;
(vii) been convicted of an indictable criminal offence (excluding an
offence under road traffic legislation in respect of which he
is not sentenced to a term of imprisonment, whether immediate
or suspended); or
(viii) become of unsound mind or a patient as defined in either
Section 112 or Section 145 of the Mental Health Act 1983 or
been admitted to a hospital in pursuance of an application made
under Part 11 of that Act.
11.2 Upon termination of the Appointment however arising:
(a) the Employee shall, without prejudice for any claim he may have
arising out of the termination of this employment hereunder, forthwith
at the request of the Board and without further claim for compensation
resign as a director of the Company and from all offices held by him
in any Group Company and from all other appointments or offices which
he holds as nominee or representative of the Company or any Group
Company and, if he fails so to do, the Company is irrevocably
authorised by the Employee to appoint some person in his name and on
his behalf to execute such documents and to do such other things as
are reasonably necessary to give effect to such resignations; and
(b) the Employee (or, if he shall be dead, of unsound mind or bankrupt,
his personal representatives or such other persons as shall be
appointed to administer his estate and affairs) shall deliver up to
the Company in accordance with the directions of the Board all keys,
security passes, credit cards, Documents and other property (including
any motor car provided pursuant to clause 5.1) belonging to or
relating to the businesses or affairs of the Company or any Group
Company, including all copies of all Documents containing or referring
to Confidential Information which may be in his possession or under
his
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control (or that of his personal representatives or such other
persons), and shall not retain copies, extracts or notes of any of the
same.
11.3 The Employee shall have no claim against the Company in respect of the
termination of the Appointment:
(a) by reason of the liquidation of the Company for the purpose of
amalgamation or reconstruction or as part of any arrangements for the
amalgamation or demerger of the undertaking of the Company not
involving liquidation provided that the Employee shall have been
offered employment with the amalgamated or reconstructed or de-merged
company or companies on terms no less favourable to him than under
this Agreement; or
(b) in relation to any provision in any articles of association, agreement
or arrangement with the Company which has the effect of requiring the
Employee to sell or give up any shares, securities, options or rights
to subscribe for such shares at any price or which causes any options
or other rights granted to him to become prematurely exercisable or
lapse.
11.4 The Board, if it has reason to suspect that any one or more of the events
set out in clause 11.1(b) has or may have occurred, may at any time suspend
the Employee for a reasonable period pending the making and completion of
such investigation(s) as the Board thinks fit. While the suspension
continues, the Company shall, unless specifically otherwise provided in
this Agreement, pay to the Employee his fixed salary and provide to him the
other benefits set out in this Agreement. During the period of suspension
the Company and relevant Group Companies shall not be obliged to provide
work to the Employee and may require the Employee to comply with such
conditions as the Company may specify in relation to attending at or
remaining away from the places of business of the Company and/or the Group
Companies during the period of the suspension. The Company may later
terminate the Appointment, pursuant to the terms of this Agreement, on the
grounds of the same or any other event in clause 11.1(b).
12 THE EMPLOYMENT PROTECTION (CONSOLIDATION) ACT 1978
12.1 This Agreement contains the particulars required to be given under Section
1 of the EPCA and the Schedule 1 comprises the note referred to in Section
1(4) of the EPCA to the intent that, as at the date of this Agreement, the
Company shall not be required to deliver to the Employee a separate written
statement pursuant to Section 1 of the EPCA.
12.2 In the event of the termination of the Appointment by expiry of the period
specified in clause 2.1, Section 54 of the EPCA and any right to receive a
redundancy payment under the EPCA shall be excluded.
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13 NOTICES
Notices by either party:
(a) must be in writing addressed:
(i) to the Company at its registered office for the time being;
(ii) and to the Employee at his place of work or at the address set
out in this Agreement or such other address as the Employee may
from time to time have notified to the Company for the purpose
of this clause; and
(b) will be effectively served:
(i) on the day of receipt, where any hand-delivered letter or a
facsimile transmission is received on a Business Day before or
during normal working hours;
(ii) on the following Business Day, where any hand-delivered letter
or facsimile transmission is received either on a Business Day
after normal working hours or on any other day;
(iii) on the second Business Day following the day of posting from
within the United Kingdom of any letter sent by first class
prepaid mail; or
(iv) on the fifth Business Day following the day of posting to an
overseas address of any prepaid airmail letter.
14 GENERAL
14.1 This Agreement, which contains all the terms of employment of the
Employee, is in substitution for all existing contract(s) of employment
between the Company and any Group Company and the Employee (whether
written, oral or governed by a course of dealings) which shall be deemed
to have terminated with effect from the Commencement Date.
14.2 The waiver, express or implied, by either Party of any right under this
Agreement or any failure to perform or breach by the other shall not
constitute or be deemed a waiver of any other right under this Agreement
or of the same right on another occasion.
14.3 No amendment, change or addition to the terms of this Agreement shall be
effective or binding on either Party unless reduced to writing and
executed by both Parties.
14.4 The Employee represents and warrants that he is not a party to any
agreement, contract (whether of employment or otherwise) or understanding
which would in any way restrict or prohibit him
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<PAGE>
from undertaking or performing any of the duties of the Appointment in
accordance with this Agreement.
14.5 The Employee undertakes not to disclose or communicate any terms of the
Appointment to any other employee of any Group Company or to any third
party (other than for the purpose of obtaining professional advice or as
required by law or the rule of any regulatory authority).
14.6 Any provision of this Agreement which contemplates or is capable of
operation after the termination of the Appointment shall apply
notwithstanding termination of the Appointment howsoever arising.
14.7 This Agreement is governed by and is to be construed in accordance with
the laws of England and the Parties hereby submit to the non-exclusive
jurisdiction of the High Court of Justice of England and Wales.
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SCHEDULE 1
NOTE OF ADDITIONAL PARTICULARS AS AT THE DATE OF THE AGREEMENT - CLAUSE 12
1 For the purposes of the EPCA the period of continuous employment of the
Employee began on 1 July 1983.
2 The Company's usual disciplinary rules will apply to the Appointment except
as otherwise expressly provided in this Agreement.
3 There are no disciplinary rules applicable to the Employee. Any matter of
discipline will be considered and determined by the Board, whose decision
shall be final. If the Employee has any grievance relating to the
Appointment, he should apply in writing to the Chairman.
4 A contracting-out certificate under the Social Security Pensions Act 1975
is not in force in respect of the Appointment.
The Company shall be at liberty at any time and at its own discretion to
vary the rules and procedures referred to in this Schedule.
<PAGE>
SCHEDULE 2
THE BONUS PAYABLE TO THE EMPLOYEE - CLAUSE 4.1(B)
1 The Company shall within 14 days after the audited accounts of the Company
have been laid before the Company in general meeting deliver to the
Employee a statement showing the amount of the Pre-tax Profits for the
financial year to which such accounts relate and the amount (if any) of the
bonus payable to the Employee which shall become due and payable on 30 June
of that year.
2 Except as expressly provided otherwise herein, in respect of any financial
year during which the Appointment is lawfully terminated in accordance with
the provisions of this Agreement, the Company shall produce a statement
showing the amount of the Pre-tax Profits for such year in accordance with
paragraph 1 of this Schedule and additionally showing the amount (if any)
of the bonus (calculated to the Termination Date) which the Employee would
have received if the Appointment had continued for the whole of such
financial year which and the proportionate amount relating to the period
during which the Appointment continued shall become due and payable 14 days
thereafter.
3 In the event of a dispute as to the amount of the Pre-tax Profits for any
financial year or as to any amount payable, the matter in dispute shall be
referred to the decision of the Auditors. The certificate of the Auditors
as to such amounts shall be final and binding on the Company and on the
Employee (or his legal personal representatives as the case may be) and in
giving the same the Auditors shall be deemed to be acting as experts and
not as arbitrators.
4 If any alteration in the issued share capital of the Company shall be
effected or the Company or any of its subsidiaries shall acquire any
company or business or in the event of changes in the attribution of income
or expenses to the Company or Teletec as a result of which the Pre-tax
Profits are in the opinion of the Board likely directly or indirectly to be
materially enlarged or reduced, such adjustment shall be made to the
calculation of Pre-tax Profits, to the rate of bonus payable thereon or to
the companies included in the calculation as the Company and the Employee
shall agree (or failing agreement as the Auditors on the application of
either the Company or the Employee in their absolute discretion shall
determine to be fair and reasonable for the purpose of counteracting such
enlargement or reduction).
<PAGE>
SCHEDULE 3
COPYRIGHT AND INVENTIONS
1 In this Schedule "Intellectual Property" shall mean patents, trade marks
and service marks, rights in inventions, designs, trade names and
copyrights (whether or not any of these is registered and including
applications for registration of any such thing) and all forms of
protection of a similar nature which may subsist anywhere in the world.
2 The Employee acknowledges, having regard to the nature of the business of
the Company and other Group Companies and the nature of the Employee's
expertise, that:
(a) the normal duties of the Employee under the Appointment may include
the making of inventions;
(b) inventions may reasonably be expected to result from the carrying out
by the Employee of such duties; and
(c) due to the nature of the Employee's duties and the particular
responsibilities arising from the nature of his duties, the Employee
has a special obligation to further the interests of the Company's
undertaking.
3 The Employee shall disclose to the Company any invention made or discovered
or produced by the Employee in the course of the Appointment (whether or
not during office hours or using office stationery and equipment) in
connection with or in any way affecting or relating to or reasonably
capable of being used or adapted for use in the business of the Company or
any other Group Company as carried on prior to the date of the invention.
4 The Employee shall do all things and execute all documents that may be
necessary to enable the Company or its nominee to obtain the benefit of
every invention made by the Employee in the course of his duties and to
secure patent or other appropriate protection for it. The costs of
preparation of all appropriate documentation pursuant to this clause shall
be borne by the Company.
5 Without prejudice to the provisions of paragraph 2 of this Schedule, the
Employee shall disclose to the Company full details of any Intellectual
Property or copyright work made or created by the Employee during the
continuance of his Appointment (whether or not during office hours or using
office stationery and equipment) in connection with or in any way affecting
or relating to or reasonably capable of being used or adapted for use in
the business of the Company or any other Group Company as carried on prior
to the date of creating the copyright work and the Employee hereby assigns
to the Company, by way of assignment of future copyright, all rights of
copyright or Intellectual Property right throughout the world in that
copyright work or Intellectual Property.
<PAGE>
6 The Employee shall, before working, assigning or granting rights in
relation to any invention or copyright work to which the Company is not
entitled under this Agreement and/or at law, allow the Company or any Group
Company nominated by it a reasonable opportunity to evaluate the same and
the Employee shall not dispose of any rights to any third party unless he
shall first have given written notice to the Company with full, complete
and bona fide details of the price and terms offered by the third party
offering the Company, or any Group Company, an opportunity to purchase the
rights concerned at the same price and on the same terms within 28 days of
the date of the notice.
ATTESTATIONS
Signed by )
for and on behalf of )
BEGINMANAGE LIMITED )
in the presence of: )
Signed by the said )
JOHN TILLISCH )
in the presence of: )
