UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
____________
Commission file number: 33-45838-C
MILLENNIUM ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Nevada 33-0750730
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31462 South Coast Highway, Suite 100
Laguna Beach, California 92677
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 499-0877
Beacon Capital Investment, Inc.
330 East Main Street, Suite 206
Barrington, Illinois 60010
Former Fiscal Year End September 30
(Former name, address and fiscal year)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ..X.. No .....
At April 30, 1997, there were 7,243,051 shares of the Registrant's $.001 Par
Value Common Stock outstanding.
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INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21-23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23-24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24-25
SIGNATURES 26
EXHIBIT INDEX 27
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MILLENNIUM ELECTRONICS, INC. AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
3/31/97 12/31/96
------- --------
(Unaudited) (Audited)
Current assets
Cash & Cash Equivalents $ 75,898 $ 0
Accounts receivable, net of an allowance
for doubtful accounts 7,283,483 6,193,241
Escrow Receivable 2,983,997 0
Inventories, net of reserve 623,038 663,882
Prepaid expenses 54,353 33,346
Deferred income taxes 95,200 0
------------ ------------
Total current assets 11,115,969 6,890,469
Furniture and equipment 61,009 55,608
Other assets 48,576 208,539
------------ ------------
Total assets $ 11,225,554 7,154,616
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Book overdraft $ 0 $ 191,742
Lines of credit 6,275,237 5,232,754
Accounts payable and accrued liabilities 1,307,663 750,053
------------ ------------
Total current liabilities 7,582,900 6,174,549
Long Term Liabilities
Deferred income taxes 9,600 0
Other Long Term Debt 16,329 0
------------ ------------
Total Long Term Debt 25,929 0
Subordinated debt - stockholder 305,968 298,811
Stockholders' equity
Common stock, par value .001:
17,000,000 shares authorized, 7,243,051
(March 31) and 5,203,868 (December 31)
shares issued and outstanding 7,243 43,400
Receivable from stockholder (150,000) (151,339)
Additional Paid Capital 3,453,514 0
Retained earnings 0 789,195
------------ ------------
Total stockholders' equity 3,310,757 681,256
------------ ------------
Total liabilities and
stockholders' equity $ 11,225,554 $ 7,154,616
============ ============
See the accompanying notes to these consolidated condensed financial statements
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MILLENNIUM ELECTRONICS, INC. AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the Three Months Ended March 31,
3/31/97 3/31/96
------- -------
(Unaudited) (Unaudited)
Net sales $ 12,577,744 $ 5,947,898
Cost of sales 11,373,611 5,205,850
------------ ------------
Gross profit 1,204,133 742,048
Selling, general and administrative expenses 827,934 465,901
------------ ------------
Income from operations 376,199 276,147
Other income (expense)
Other income 18,771 2,555
Other expense (151,233) (70,789)
------------ ------------
Income before provision for income taxes 243,737 207,913
Provision for income taxes
Current 4,656 2,800
Deferred (85,600) 0
------------ ------------
Net income $ 324,681 $ 205,113
============ ============
Net income per share $ .06 $ .04
============ ============
Weighted average shares outstanding 5,226,518 5,203,868
============ ============
See the accompanying notes to these consolidated condensed financial statements
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MILLENNIUM ELECTRONICS, INC. AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
3/31/97 3/31/96
------- -------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income $ 324,681 $ 205,113
Adjustments to reconcile net income
to net cash used in operating activities
Deferred income taxes (85,600) 0
Depreciation and amortization 4,451 2,816
Issuance of common stock for services 38,400
(Increase) decrease in
Accounts receivable (1,090,242) (473,246)
Inventories 40,844 (483,938)
Prepaid expenses (21,007) (22,376)
Other assets 12,983 (6,761)
Increase (decrease) in
Accounts payable and accrued liabilities 432,013 431,287
----------- -----------
Net cash used in operating activities (381,877) (308,705)
----------- -----------
Cash flows from investing activities
Acquisition of Beacon, net of cash acquired 513,534 0
Acquisition of furniture and equipment (9,852) (7,225)
Issuance of note receivable to stockholder 1,339 (40,500)
----------- -----------
Net cash provided by (used in) investing
activities 505,021 (47,725)
----------- -----------
Cash flows from financing activities
Net proceeds from line of credit facility 1,042,484 305,782
Increase (decrease) in book overdraft (191,742) 43,172
Distributions to stockholders (533,257)
Offering costs and commissions (388,217)
Proceeds from stockholder loan 23,486 7,476
----------- -----------
Net cash provided by (used in)
financing activities (47,246) 356,430
Net change 75,898 --
Cash at beginning of period -- --
----------- -----------
Cash at end of period $ 75,898 $ --
=========== ===========
See the accompanying notes to these consolidated condensed financial statements
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MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Organization and Operations
- ---------------------------
Millennium Electronics, Inc., a Nevada corporation (the
"Registrant"), is the successor by merger to Beacon Capital Investment, Inc., a
Delaware corporation ("Beacon"), effective March 31, 1997. The exchange rate in
the reincorporation merger was two and one-half shares of Beacon for one share
of the Registrant. In a substantially concurrent reverse triangular merger,
Millennium Memory, Inc., a California corporation ("MMI"), became a wholly-owned
subsidiary of the Registrant. The Registrant issued 6,779,768 shares of its
common stock in a one-for-one exchange for all of the issued and outstanding
common stock of MMI. The original name of Registrant in Nevada was "Millennium
Holdings, Inc." which was changed upon the mergers to "Millennium Computer,
Inc." and to "Millennium Electronics, Inc." on April 9, 1997. The transaction
coincided with the closing of a private placement of 1.5 million shares of MMI
for gross proceeds of $3.0 million.
Prior to the mergers, Beacon had no business activity. The Registrant
and MMI (referred to collectively herein as the "Company") continue MMI's
business of manufacturing, through subcontractors, and distributing Dynamic
Random Access Memory ("DRAM") memory upgrade components for personal computers
("PC's"), laptop and notebook computers, file servers and printers to retailers,
resellers, value added resellers ("VARs"), value added distributors ("VADs"),
original equipment manufacturers ("OEMs"), aggregators and national or regional
distributors.
For accounting purposes, the acquisition by merger was treated as a
recapitalization of MMI (reverse acquisition). MMI is presented as the
continuing entity and the historical financial statements are those of MMI.
Historical stockholders' equity of MMI prior to the merger was retroactively
restated for the equivalent number of shares received in the merger, after
giving effect to the reverse stock split. Due to Beacon's lack of business
activity prior to the merger, no goodwill is being recorded.
Summary of Significant Accounting Policies
- ------------------------------------------
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company after the elimination of all material intercompany
accounts and transactions.
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Interim Financial Information
-----------------------------
The consolidated interim financial statements included herein have
been prepared by the Registrant, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations.
The consolidated interim financial statements reflect all adjustments
(which include only the normal recurring adjustments) necessary for a fair
presentation of financial position, results of operations and cash flows for
such periods. The results of operations for the three month period ended March
31, 1997 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1997, or any other future periods.
Revenue Recognition
-------------------
The Company recognizes revenue from product sales at the time of
shipment net of expected returns. The Company has established programs, under
specified conditions, that enable its customers to return product.
Inventories
-----------
Inventories, which are primarily memory chips, are stated at the
lower of cost (weighted average method) or market.
Lines of Credit
- ---------------
As of March 31, 1997, the Company had a $7,000,000 line of credit
(accounts receivable credit line) expiring September 30, 1998. On the expiration
date, the line shall automatically and continuously renew for successive
additional terms of one year unless terminated at the option of the Company or
bank on the anniversary date. The line bears interest at prime plus 3% per
annum. The Company's ability to borrow money under this line of credit agreement
is based upon a percentage of defined accounts receivable. Also, the line is
collateralized by substantially all assets of the Company and guaranteed by the
Registrant's majority stockholder. The debt agreement contains certain
restrictions as to adequate insurance and Company advances and loans, and limits
distributions to stockholders. In addition, the Company is required to make a
credit facility fee payment of $3,500 per quarter in advance; and a $50,000 loan
fee is payable on the earlier of the third anniversary date (September 1998) or
the date the loan agreement is terminated or terminates by its terms. The
$50,000 loan fee is being accrued annually over the term of the loan.
As of March 31, 1997, the Company had an additional $500,000 line of
credit (inventory credit line). The Company borrowed an initial amount of
$150,000 against this line in January 1997 which was repaid in early April 1997.
Any additional advances are repaid by applying 25% of each advance from the
accounts receivable credit line. The Company's ability to borrow money under
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this line of credit agreement is based upon a percentage of defined inventory.
This line of credit's remaining terms are identical to the accounts receivable
credit line.
The outstanding balances under the accounts receivable and inventory
lines of credit agreements at March 31, 1997 were $6,125,237 and $150,000,
respectively, for an aggregate amount of $6,275,237.
Related Party Transactions
- --------------------------
The Company pays, on behalf of the majority stockholder of the
Registrant, monthly lease payments of approximately $2,160 for two vehicles.
As of March 31, 1997, $150,000 of the receivable from a stockholder
was offset against stockholders' equity. This note receivable was paid off by
the stockholder early April 1997.
At March 31, 1997, the Company had subordinated debt due to its
majority stockholder in the amount of $305,968. The amount was repaid to the
stockholder early April 1997.
As of March 31, 1997, the Company had commissions payable of $88,000
to a stockholder of the Registrant. The Company paid the stockholder
approximately $136,000 of commissions for the year ended December 31, 1996. The
$88,000 was paid to the stockholder in early April 1997.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
statements of the Company included in this Form 10-Q.
Forward Looking Statements
- --------------------------
The statements contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations include "forward looking"
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
and are subject to the safe harbor created by those sections. The actual future
results of the Company could differ materially from those projected in the
forward looking information. For a discussion of certain factors that could
cause actual results to differ materially from those projected by the forward
looking information see "Factors That May Affect Future Results" herein.
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Background
- ----------
The Company manufactures, through subcontractors, and distributes
DRAM memory upgrade components for PC's, laptop and notebook computers, file
servers and printers to retailers, resellers, VARs, VADs, OEMs, aggregators and
national or regional distributors. In addition, the Company is also selling
computer systems which are purchased on a pre-sold basis and are primarily sold
to the Company's largest customer as part of servicing this customer.
MMI effectively commenced operations in April of 1995 focusing on the
manufacture, through subcontractors, and sale of standard memory modules to
retailers, resellers, VARs, VADs, OEM's, aggregators, and national and regional
distributors. Standard memory modules implement industry standard specifications
and are designed to be incorporated into a wide variety of electronic equipment.
The Company's net sales and gross profits have increased substantially over the
last two years.
The demand for memory upgrades in digital electronic systems has
grown dramatically over the last several years. The factors which have
contributed to the increasing demand for memory devices include the expanding
unit sales of personal computers in the business and consumer market segments;
the proliferation of increasingly complex personal computer software; and the
increasing performance requirements of workstations, servers and networking and
telecommunications equipment.
The Company purchases memory chips in the domestic spot market and
from overseas trading companies which have direct allocations from chip
manufacturers. The Company also purchases directly from chip manufacturers. Once
memory chips have been purchased, the Company sends the chips to a subcontractor
which builds and tests the finished goods memory product. After it receives the
assembled memory boards from the subcontractor, the Company retests the boards
and adds a unique Company warranty label to each product. For the most part,
memory inventory purchased by the Company is sold before the chips are purchased
and assembled into memory boards.
In 1996 and in the three-month period ended March 31, 1997, the
Company's top ten customers accounted for approximately 80% and 84%,
respectively, of the Company's net sales. While the Company expects to continue
to be dependent upon these customers for a significant percentage of its net
sales, the composition of the Company's top ten customers may change in the
future. The Company has added a number of new customers in recent months, and
its strategy is to increase its sales to both existing and new customers.
However, the percentage of the Company's net sales represented by the Company's
largest customer is continuing to grow. International sales by the Company were
minimal in both periods.
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Income as a Percentage of Net Sales
- -----------------------------------
The following table sets forth certain condensed statements of income
data of the Company expressed as a percentage of net sales (unaudited):
Three months
Ended
March 31,
1997 1996
---- ----
Net sales ................................................ 100.0% 100.0%
Cost of sales ............................................ 90.4 87.5
Gross Profit ............................................. 9.6 12.5
Sales, general & administrative .......................... 6.6 7.2
Income from operations ................................... 3.0 5.3
Other income (expense), net .............................. (1.1) (1.2)
Income before provision for income taxes ................. 1.9 4.1
Provision for income taxes ............................... (.7) .0
Net income ............................................... 2.6 4.1
Net Sales
- ---------
Net sales consist of sales of memory modules and PC cards less
returns and discounts.
Net sales increased approximately 111% from approximately $5,948,000
in the three-month period ended March 31, 1996 to approximately $12,578,000 in
the three-month period ended March 31, 1997. The increase was primarily due to
an increase in sales of memory products to both existing and new customers. The
Company's sales of PC cards to both new and existing customers also increased
significantly from period to period. The Company is also expanding its product
line to include sales of complete computer systems.
Gross Profit
- ------------
Cost of sales includes the costs of memory chips and other components
and materials purchased by the Company for its products, as well as
subcontractor charges and overhead costs associated with testing.
Gross profit increased approximately 62% from approximately $742,000
in the three-month period ended March 31, 1996 to approximately $1,204,000 in
the three-month period ended March 31, 1997. Gross margin decreased from 12.5%
in the three-month period ended March 31, 1996 to 9.6% in the three-month period
ended March 31, 1997. This decrease in gross margin was principally due to
higher pricing from suppliers and subcontractors that the Company has been
unable to pass on to its customers.
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Sales, General and Administrative
- ---------------------------------
Sales, general and administrative costs include all personnel costs,
including salaries, commissions, performance-based bonuses and employee
benefits, the costs of advertising, promotions and trade shows, and rental costs
and other support costs, including utilities, insurance and professional fees.
Sales, general and administrative expenses increased approximately
78% from approximately $466,000 in the three-month period ended March 31, 1996
to approximately $828,000 in the three-month period ended March 31, 1997. As a
percentage of net sales, general and administrative expenses decreased from 7.8%
in the three-month period ended March 31, 1996 to 6.6% in the three-month period
ended March 31, 1997. Such decreases were due to the growth in net sales
combined with the Company's positive efforts to control costs. The Company
expects general and administrative expenses to increase significantly in
absolute dollars in future periods as the Company continues to grow. The Company
also expects to incur additional administrative and other costs associated with
being a public company.
Other Income (Expense), Net
- ---------------------------
Other income (expense), net consists primarily of interest income,
less interest expense. Interest expense is attributable to the Company's
utilization of its lines of credit. The Company's use of its principal line of
credit increased in the three-month period ended March 31, 1997 from the
corresponding period in the prior year. That increase was used to fund increased
inventory and receivables as a result of increased sales. The Company expects
that its utilization of its principal line of credit will increase as its sales
increase. Accordingly, the Company expects interest expenses to increase in the
future.
Provision for Income Taxes
- --------------------------
Provision for income taxes has been minimal because MMI was an "S"
corporation. Beginning after March 31, 1997, the Company will begin to file
consolidated returns which include MMI as a "C" corporation. Had MMI been taxed
as a "C" corporation for the three-months ended March 31, 1996, the provision
for income taxes would have been $83,200. For the three months ended March 31,
1997, the provision for income taxes would have been $97,500. The effective tax
rate for each of those periods would have been 40%. The Company does not expect
the Company's effective tax rate to vary significantly from such rates. As a
result of the Company changing its tax status from an "S" corporation to a "C"
corporation, the Company recorded a tax benefit of $85,600 resulting from the
establishment of a net deferred tax asset at March 31, 1997.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has used funds generated primarily
from operations and certain borrowings to support its operations, acquire
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capital equipment and finance inventory and accounts receivable. In the
three-month periods ended March 31, 1996 and March 31, 1997, the Company had
cash deficits in operating activities of approximately $309,000 and $382,000,
respectively. The Company primarily funded the operating deficits from amounts
borrowed under the existing lines of credit. At March 31, 1997, the Company
had a cash balance of approximately $76,000 and approximately $875,000
available under its principal line of credit. Its working capital was
approximately $3,533,000. The increase in working capital is primarily due to
the escrow receivable (proceeds from the private placement offering) in the
amount of approximately $2,984,000.
The Company has a revolving line of credit of $7,000,000 which is
secured by substantially all of the Company's assets and which expires on
September 30, 1998. On the expiration date the line will automatically and
continuously renew for successive additional terms of one year unless terminated
at the option of the Company or the bank on the anniversary date. Amounts
available for borrowing under the Company's existing line of credit are limited
to the lower of the commitment amount or a borrowing base amount calculated
based on certain levels of inventory and accounts receivable. At March 31, 1997,
the Company had approximately $6,275,000 outstanding and $875,000 was available
for borrowing under its principal line of credit. Financial covenants set forth
in the Company's line of credit agreement prohibit the Company from paying
dividends in excess of 40% of the Company's after tax earnings and where the
payment of such dividends would reduce the Company's net worth below certain
levels. The line of credit is personally guaranteed by the Registrant's
principal stockholder.
Capital expenditures totaled approximately $7,200 and $9,900 in the
three-month periods ended March 31, 1996 and 1997, respectively. Such
expenditures were primarily for office and test equipment. The Company intends
to spend approximately $65,000 on similar capital expenditures in the remaining
quarters of 1997.
From time to time, the Company evaluates acquisitions of businesses,
products or technologies that complement the business of the Company. The
Company has no present understandings, commitments or agreements with respect to
any material acquisitions of other businesses, products or technologies. Any
such transactions, if consummated, may use a portion of working capital or
require the issuance of equity.
The Company believes that the net proceeds from the private placement
offering, together with existing funds, anticipated cash flow from operations
and amounts available under its existing lines of credit will be sufficient to
meet its working capital and capital expenditure requirements for the next 12
months.
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Factors That May Affect Future Results
- --------------------------------------
The Company's business, financial condition and results of operations
could be impacted by a number of factors including without limitation the
factors discussed below.
Significant Customer Concentration
----------------------------------
A single customer accounted for 12%, 50%, and 60% of the Company's
total sales in 1995 and 1996, and in the three months ended March 31, 1997,
respectively. At December 31, 1995 and 1996, and at March 31, 1997 the amounts
due from this major customer amounted to approximately $890,000, $4,785,000, and
$4,598,000, respectively. The Company's ten largest customers accounted for 25%,
80% and 84% of total sales in those periods. The Company expects to continue to
be dependent upon those customers for a significant percentage of its total
sales. However, there can be no assurance that such customers will continue to
utilize the Company's products at current levels, if at all. The Company intends
to use a portion of the proceeds of the private placement to expand its customer
base. However, there can be no assurance that it will be successful in doing so.
The loss of a major customer or any reduction in orders by any such customer
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's financial results will depend
in significant part upon the success of its customers' products.
The Company generally has no firm long-term volume commitments from
its customers and generally enters into individual purchase orders with its
customers. The Company has experienced cancellations of orders and fluctuations
in order levels from period to period and expects it will continue to experience
such cancellations and fluctuations in the future. In addition, customer
purchase orders may be canceled and order volume levels can be changed, canceled
or delayed with limited or no penalties. The replacement of canceled, delayed or
reduced purchase orders with new business cannot be assured. Moreover, the
Company's business, financial condition and results of operations will depend in
significant part upon its ability to obtain orders from new customers, as well
as the financial condition and success of its customers, its customers' products
and the general economy. The factors affecting any of the Company's major
customers or their customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Intense Competition
-------------------
The memory module industry is intensely competitive. The memory
module manufacturing market is comprised of a large number of competitive
companies, several of which have achieved a substantial share of their
respective markets. Certain of the Company's competitors in each of these
markets have substantially greater financial, marketing, technical, distribution
and other resources, greater name recognition, lower cost structures and larger
customer bases than the Company. In the OEM memory module market, the Company
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competes against semiconductor manufacturers that maintain captive memory module
production capabilities, including Celestica (a division of IBM), Integrated
Device Technology, Inc., Micron Electronics, Inc. (a subsidiary of Micron
Technology Inc.), and Multichip Technology, Inc. (a division of Cypress
Semiconductor Corporation). The Company also competes with independent memory
module manufacturers, including PNY Electronics, Inc. In the computer systems
reseller market for memory modules, the Company primarily competes with Kingston
Technology, Inc., SMART Modular Technologies, Viking Technology, Inc. and Vision
Tek. The Company faces competition from current and prospective customers that
evaluate the Company's capabilities against the merits of manufacturing products
internally. In addition, the Company competes and expects to continue to compete
with certain of its suppliers. Those suppliers may have the ability to
manufacture competitive products at lower costs than the Company as a result of
their integration. The Company also faces and may face competition from new and
emerging companies that have recently entered or may in the future enter the
markets which the Company serves. To be competitive, the Company must continue
to produce products promptly, maintain quality levels, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete favorably
on the basis of price. In addition, increased competitive pressure has led in
the past and may continue to lead to intensified price competition, resulting in
lower prices and gross margins, which could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to compete successfully in the
future.
Fluctuations in Operating Results
---------------------------------
The Company's results of operations and gross margins have in the
past fluctuated significantly and may in the future continue to fluctuate
significantly from period to period. The primary factors that have affected and
may affect in the future the Company's results of operations include the
inability to procure required components, adverse changes in the mix of products
sold by the Company , fluctuating market demand for, and declines in the selling
prices of the Company's products, market acceptance of new products and enhanced
versions of the Company's products, delays in the introduction of new products
and enhancements to existing products, manufacturing inefficiencies associated
with the start up of new product introductions, the timing of new product
announcements and releases by the Company or its competitors, the timing of
significant orders, patterns of spending by customers, delays, cancellations or
rescheduling of orders due to customer financial difficulties or other events,
inventory obsolescence, including the reduction in value of the Company's
inventories due to unexpected price declines, unexpected product returns, and
cycles in the Company's targeted markets. Other factors which may affect the
Company's results of operations in the future include the loss of a principal
customer or the short term loss of a customer due to product inventory
accumulation by the customer, the ability to volume produce products and meet
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customer requirements, the timing of expenditures in anticipation of increased
sales, and regulatory changes.
In addition, operating results in future periods may be impacted by
general economic conditions and various competitive factors, including
price-based competition and competition from other parties employing competing
technologies. The Company's operating results could also be affected in any
given period by business interruptions or costs associated with an earthquake,
fire, theft or other similar events outside the control of the Company, which
events may not be fully covered by applicable insurance coverages.
The Company's gross margins have varied and will continue to vary
significantly based on a variety of factors, including the mix of products sold
and the manufacturing services provided, the channels through which the
Company's products are sold, declines in selling prices, the level of
manufacturing efficiencies achieved and pricing by competitors or suppliers. The
selling prices of the Company's existing products have declined in the past and
the Company expects that prices will decline in the future. Accordingly, the
Company's ability to maintain or increase net sales will be highly dependent
upon its ability to increase unit sales volumes of existing products and to
introduce and sell new products in quantities sufficient to compensate for the
anticipated declines in selling prices. Declining selling prices may also have a
material adverse effect on the Company's gross margins unless the Company is
able to reduce its cost per unit to offset declines in selling prices. There can
be no assurance that the Company will be able to increase units sales volumes,
introduce and sell new products or reduce its cost per unit.
The Company's results of operations may also be affected by inflation
and the value of the United States dollar due to the fact that the Company
purchases components from foreign suppliers. Fluctuations in the value of the
United States dollar in relation to foreign currencies could increase the cost
of certain components for the Company's products and could also make the price
of the Company's products in foreign countries more expensive compared to the
price of other companies' products denominated in other currencies.
There can be no assurance that the Company will maintain its current
level of net sales or rate of growth for any period in the future. Accordingly,
there can be no assurance that the Company will be able to be profitable or that
it will not sustain losses in future periods. The Company believes that
period-to-period comparisons of the Company's financial results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Due to the foregoing factors, it is likely that in some future
quarter the Company's operating results will be below the expectations of public
market analysts and investors.
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Dependence on Limited Sources of Supply
---------------------------------------
The Company depends on third party manufacturers to produce certain
of the Company's memory module products. The electronics industry has
experienced shortages in semiconductor memory devices, including DRAM. The
Company generally has no written agreements with its suppliers. The inability to
continue to obtain sufficient supplies of components as required, or to develop
alternative sources if required, could cause delays, disruptions or reductions
in product shipments which could damage relationships with current or
prospective customers, could increase prices and could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will receive adequate supplies on a
timely basis in the future despite the strong relationships with their current
suppliers.
Inventory Purchasing Policy
---------------------------
The Company's current policy is to purchase 75% of its inventory only
if it has been pre-sold; the balance is generally purchased at reduced prices in
anticipation of future sales. Such purchases will expose the Company to the risk
that it will not be able to use such components before they become obsolete and
to adverse fluctuations in the price of such components and of the products the
Company sells. Accordingly, there can be no assurance that the Company's
purchasing policy will be profitable.
Management of Growth; Expansion of Operations
---------------------------------------------
The Company has significantly expanded its operations since its
inception. Projected future growth will significantly increase the
responsibility of existing management which may place a significant strain on
the Company's limited personnel, management and other resources. The Company's
ability to manage future growth will depend upon continued expansion of its
accounting and other internal management systems, procedures and controls. There
can be no assurance that significant problems in those areas will not occur. Any
failure to expand those systems, procedures and controls in an efficient manner
and at a pace consistent with the Company's business could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In connection with the Company's recent growth, the Company's
operating expenses have increased significantly and the Company anticipates that
operating expenses will continue to increase significantly in the future. Should
the Company increase its expenditures in anticipation of a future level of sales
that does not materialize, the Company's business, financial condition and
results of operations would thereby be subject to material adverse effects.
Certain customers have required and may continue to require accelerated delivery
schedules which have placed and may continue to place an excessive burden on the
Company's resources. In order to achieve anticipated sales levels and
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profitability, the Company will continue to be required to manage its assets
and operations efficiently. In addition, should the Company expand
geographically, it may experience certain inefficiencies from management of
geographically dispersed facilities.
Dependence on Semiconductor and Computer Industries
---------------------------------------------------
The semiconductor industry has been characterized by cyclical market
conditions. The industry has experienced significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices and production overcapacity. As a result of
overproduction and lower than anticipated sales of Windows 95(R), in 1996 the
price of DRAM declined by as much as 80% from the beginning of the year,
resulting in much lower profit per memory unit. During 1996, there were
significant declines in DRAM and SRAM semiconductor prices and declines in Flash
semiconductor prices. These price declines as well as any future price declines
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, the Company may experience
substantial period-to-period fluctuations in future operating results due to
general industry conditions or events occurring in the general economy. From
time to time, the computer industry, like the semiconductor industry, has
experienced significant downturns, often in connection with, or in anticipation
of, declines in general economic conditions. Accordingly, any factor adversely
affecting the semiconductor or computer industries or particular segments within
the semiconductor or computer industries, such as the market for memory
products, could materially adversely affect the Company's sales and results of
operations.
Requirements for Response to Rapid Technological Change
-------------------------------------------------------
The semiconductor and computer industries are subject to rapid
technological change, short product life cycles, frequent new product
introductions and enhancements, changes in end-user requirements and evolving
industry standards. The Company's ability to be competitive in these markets
will depend in significant part upon its ability to provide technologically
advanced products, maintain quality levels, offer flexible delivery schedules,
deliver finished products on a reliable basis and compete favorably on the basis
of price.
Dependence on Key Personnel
---------------------------
The Company's future operating results depend in significant part
upon the continued contributions of its senior management and sales personnel,
many of whom would be difficult to replace. Of such persons only the Company's
Chief Executive Officer, Mr. Troy D. Barnes, and its Vice President of Capital
Markets, Douglas P. Morris, have written employment agreements with the Company.
The Company's future operating results also depend in significant part upon its
ability to attract and retain qualified management, manufacturing and quality
assurance, engineering, marketing, and sales personnel. The Company is actively
recruiting such personnel. However, competition for such personnel is intense,
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and there can be no assurance that the Company will be successful in
attracting or retaining such personnel now or in the future. There may be only
a limited number of persons with the requisite skills to serve in such
positions, and it may be increasingly difficult for the Company to hire such
persons over time. The loss of any key employee, the failure of any key
employee to perform in his or her current position, the Company's inability to
attract and retain skilled employees as needed or the inability of the
officers and key employees of the Company to expand, train and manage the
Company's employee base could materially adversely affect the Company's
business, financial condition and results of operations.
No Assurance of Product Quality, Performance and Reliability
------------------------------------------------------------
The Company expects that its customers will continue to establish
demanding specifications for quality, performance, reliability and delivery. In
the past, the Company has not experienced significant quality problems, in part
because the manufacturers of memory modules sold by the Company have accepted
responsibility for any product returns. However, there can be no assurance that
problems will not occur in the future with respect to the quality, performance,
reliability and delivery of the Company's products. If such problems occur, the
Company could experience increased costs, delays in or cancellations or
reschedulings of orders or shipments, delays in collecting accounts receivable
and increases in product returns and discounts, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Uncertainty Regarding Protection of Proprietary Rights
------------------------------------------------------
The Company attempts to protect its intellectual property rights
through trademarks, trade secrets and a variety of other measures including
non-disclosure agreements. There can be no assurance, however, that such
measures will provide adequate protection for the Company's trade secrets or
other proprietary information, that disputes with respect to the ownership of
its intellectual property rights will not arise, that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors or that the Company can otherwise meaningfully protect its
intellectual property rights. There can be no assurance that third parties will
not assert intellectual property infringement claims against the Company. In
addition, there can be no assurance that foreign intellectual property laws will
adequately protect the Company's intellectual property rights abroad. The
failure of the Company to protect its proprietary rights could have a material
adverse effect on its business, financial condition and results of operations.
The Company has filed applications with the United States Patent and Trademark
Office for registration of the mark and logo "MILLENNIUM Memory, Inc." There is
no assurance that registration of the mark and logo will be unopposed or granted
even if not opposed. Indeed, the distinctive word "MILLENNIUM" is currently
employed by several other companies involved in the manufacture and/or sale of
computer products and some of those companies have obtained or applied for
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<PAGE>
trademarks prior to the Company's application or first use of the name
"MILLENNIUM." Such prior use and filing reduces further the likelihood that
trademark registration will be issued to the Company.
In the semiconductor and computer industries, it is typical for
companies to receive notices from time to time alleging infringement of patents
or other intellectual property rights of others. While there is currently no
pending intellectual property litigation involving the Company, the Company may
from time to time in the future be notified of claims that it may be infringing
patents, copyrights or other intellectual property rights owned by third
parties. There can be no assurance that such third parties will not in the
future pursue claims against the Company with respect to the alleged
infringement of patents, copyrights or other intellectual property rights owned
by third parties. In addition, litigation may be necessary to protect the
Company's intellectual property rights and trade secrets, to determine the
validity of and scope of the proprietary rights of others or to defend against
third party claims of invalidity. Any litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use
or ownership claims of third parties or claims for indemnification resulting
from infringement claims will not be asserted in the future. If any claims or
actions are asserted against the Company, the Company may seek to obtain a
license under a third party's intellectual property rights. There can be no
assurance, however, that a license will be available under reasonable terms or
at all. The failure to obtain a license under a patent or intellectual property
right from a third party for technology used by the Company could cause the
Company to incur substantial liabilities and to suspend the manufacture of the
products utilizing the invention. In addition, should the Company decide to
litigate such claims, such litigation could be extremely expensive and time
consuming and could materially adversely affect the Company's business,
financial condition and results of operations, regardless of the outcome of the
litigation.
Environmental Issues
--------------------
The Company's operations are not currently impacted significantly by
federal, state, local and foreign environmental protection laws and regulations.
However, changes in environmental laws and regulations and in the Company's
business could subject the Company to significant compliance expenses,
production suspensions or delay, restrictions on expansion, the acquisition of
costly equipment or other liabilities.
Recently Issued Accounting Pronouncement
- ----------------------------------------
The Financial Accounting Standards Board issued a Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share,"
which is effective for financial statements issued for periods ending after
December 31, 1997. SFAS No. 128 requires public companies to present basic
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earnings per share and, if applicable, diluted earnings per share, instead of
primary and fully diluted earnings per share. The Company has not yet
determined the effect of adopting SFAS No. 128.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
The Registrant is the successor by merger to Beacon effective March
31, 1997. In a substantially concurrent reverse triangular merger, MMI became a
wholly-owned subsidiary of the Registrant. The Registrant issued 6,779,768
shares of its $.001 Par value Common Stock ("Common Stock") in a one for one
exchange for all of the issued and outstanding common stock of MMI. As part of
the transaction, Beacon changed its name and state of incorporation to Nevada
through a reincorporation merger into the Registrant. The exchange rate in the
reincorporation merger was two and one-half for one. The mergers coincided with
the closing of a private placement of 1.5 million shares of MMI for gross
proceeds of $3.0 million. The Registrant is now in the process of furnishing
notice to all of its stockholders to surrender the certificates evidencing
shares of Beacon and MMI to the Registrant's transfer agent for cancellation and
reissuance of certificates evidencing shares of Common Stock of the Registrant
The Articles of Incorporation of the Registrant authorize $.001 Par
Value Preferred Stock of the Registrant ("Preferred Stock"), no shares of which
are currently issued or outstanding. Subject to the rights of holders of
Preferred Stock, if any, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. The Registrant does
not anticipate paying any cash dividends in the foreseeable future. Common Stock
has no conversion or preemptive rights or other subscription rights. There are
no sinking fund or redemption provisions applicable to Common Stock. The holders
of Common Stock are entitled to one vote per share on all matters to voted upon
by the stockholders. Subject to the rights of holders of Preferred Stock, if
any, in the event of liquidation, dissolution or winding up of the Registrant,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities.
The Board of Directors of the Registrant may designate and issue
Preferred Stock in such series and with such preferences, privileges and powers
as the Board of Directors may determine.
On March 17, 1997, Common Stock Purchase Warrants to purchase 588,231
shares at $3.125 per share which were to expire on March 31, 1997 were extended
to June 30, 1997.
On April 1, 1997, 6,703,868 shares of Common Stock of the Registrant
were issued to the former MMI shareholders as part of the merger in exchange
for all of their shares of common stock of MMI. The MMI shares were valued at
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<PAGE>
$13,407,736 in the aggregate. The Registrant's shares of Common Stock were
issued to the former MMI shareholders without registration pursuant to Section
3(a)(10) of the Securities Act of 1933, as amended (the "Act"), upon issuance
of a permit by the Department of Corporations of the State of California. Such
the shares of Common Stock are "restricted securities" which may be
transferred pursuant to Rule 145 under the Act. The Registrant's transfer
agent has been instructed not to transfer until on or after October 1, 1997 on
the Registrant's stock ledger 1,500,000 of such shares of Common Stock issued
to former MMI shareholders who became shareholders of MMI immediately prior to
the merger in the private placement at a gross aggregate offering price of
$3,000,000. MMI's placement agent was paid commission of $300,000 in
connection with the private placement, and on April 1, 1997 was issued 75,000
shares of Common Stock and warrants to purchase an additional 75,000 shares of
Common Stock for $2.00 per share as an additional commission. The warrants are
exercisable at any time prior to March 31, 2000. The shares and warrants were
issued to MMI's placement agent under the exemption from registration provided
by Section 4(2) of the Act in that they did not involve a public offering.
On April 1, 1997, the former chief executive of Beacon, now a Vice
President and Director of the Registrant, was granted an option to purchase
300,000 shares of Common Stock at an exercise price of $3.00 per share in
consideration of consulting services. The option is exercisable at any time
prior to March 31, 2002. The option was issued under the exemption from
registration provided by Section 4(2) of the Act in that it did not involve a
public offering.
On April 1, 1997, warrants to purchase 20,000 shares of Common Stock
were issued to a finder in connection with the merger at an exercise price of
$3.125 per share. The warrants are exercisable at any time prior to April 30,
1999. The warrants were issued under the exemption from registration provided by
Section 4(2) of the Act in that they did not involve a public offering.
On April 1, 1997, warrants to purchase 50,000 shares of Common Stock
at an exercise price of $2.00 per share in favor of a creditor of MMI were
converted in connection with the merger from warrants to purchase shares of
common stock of MMI.
The holders or their transferees of options or warrants to purchase
approximately 553,000 shares of the Registrant's Common Stock are entitled, as
of April 1, 1997, to certain rights with respect to the registration under the
Act of such shares. Under the terms of a registration rights agreement between
the Registrant and such holders, if the Registrant proposes to register any of
its securities under the Act, either for its own account or the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such common
stock therein; provided, among other conditions, that the underwriters of any
offering may limit the number of shares included in such registration. In
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<PAGE>
addition, certain of the holders of such shares may require the Registrant on
not more than one occasion to file a registration statement under the Act with
respect to their shares of the Registrant's Common Stock and the Registrant
would then be required to use its best efforts to effect such registration,
subject to certain conditions and limitations. Holders may request or demand
registration at any time after October 1, 1997. A copy of the Registration
Rights Agreement is attached as an exhibit hereto.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
A special meeting of the stockholders of Beacon was held on March 31,
1997.
The following directors elected at the meeting are all of the
directors whose term of office as a director continued after the meeting:
FOR AGAINST ABSTAIN
--- ------- -------
Troy D. Barnes 833,604 0 0
Daniel H. Glick 833,604 0 0
Douglas P. Morris 833,604 0 0
Proposal 1 was presented seeking stockholder approval of a one for
two and one-half reverse stock split of Beacon's common stock. The reverse stock
split was a condition to the merger with MMI. The vote on Proposal 1 was:
FOR AGAINST ABSTAIN
--- ------- -------
833,604 0 0
Proposal 2 was presented seeking stockholder approval of
reincorporation of Beacon in Nevada and a name change to "Millennium Holdings,
Inc." by a merger into a wholly-owned subsidiary of Beacon formed in Nevada. The
vote on Proposal 2 was:
FOR AGAINST ABSTAIN
--- ------- -------
833,604 0 0
Proposal 3 was presented seeking approval of the merger with MMI
whereby (i) a wholly-owned subsidiary of Beacon would merger into MMI with
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<PAGE>
MMI as the survivor, (ii) each share of MMI will be converted into one share
of the Registrant, (iii) each option to purchase one share of MMI will be
converted into an option to purchase one share of the Registrant, (iv) each
share of Beacon's subsidiary will be converted into shares of MMI, and (v)
after the merger effective date, MMI will be a wholly-owned subsidiary of the
Registrant. Proposal 3 was subject to approval of Proposals 1 and 2. The vote
on Proposal 3 was:
FOR AGAINST ABSTAIN
--- ------- -------
833,604 0 0
Item 5. Other Information
-----------------
On May 2, 1997, the Registrant adopted a fiscal year ending December
31 which coincides with MMI's fiscal year end.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit No. Description
- ----------- -----------
2 Agreement and Plan of Merger - incorporated by reference to
Exhibit A to Report on Form 8-K filed with the SEC April 14,
1997 (SEC File No. 33-45838-C).
3(i) Articles of Incorporation of the Registrant - incorporated by
reference to Exhibit B to Report on Form 8-K filed with the SEC
April 14, 1997 (SEC File No., 33-45838-C).
3(ii) Bylaws of the Registrant - incorporated by reference to Exhibit
C to Report on Form 8-K filed with the SEC April 14, 1997 (SEC
File No. 33-45838-C).
10 Registration Rights Agreement dated March 31, 1997 among Beacon
Capital Investment, Inc. and Certain Option and Warrant Holders.
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On March 28, 1997, Beacon filed with the SEC a Form 8-K dated March
17, 1997 to report that one-half of the Common Stock Purchase Warrants sold in
Beacon's initial public offering expired.
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<PAGE>
On April 14, 1997, the Registrant filed with the SEC a Form 8-K dated
April 14, 1997 to report the transactions more fully described in Item 2 above.
On April 18, 1997, Beacon filed with the SEC a Form 8-K/A dated March
31, 1997 to report that Common Stock Purchase Warrants sold in Beacon's initial
public offering which were to expire on March 31, 1997 were extended to June 30,
1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 13, 1997 MILLENNIUM ELECTRONICS, INC.
By: /s/ Troy D. Barnes
------------------------------------
Troy D. Barnes
President, Chief Executive Officer
and Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
Exhibit Page
- ------- ----
Agreement and Plan of Merger - incorporated by reference to
Exhibit A to Report on Form 8-K filed with the SEC April 14,
1997 (SEC File No. 33-45838-C).
Articles of Incorporation of the Registrant - incorporated
by reference to Exhibit B to Report on Form 8-K filed with
the SEC April 14, 1997 (SEC File No., 33-45838-C).
Bylaws of the Registrant - incorporated by reference to
Exhibit C to Report on Form 8-K filed with the SEC April 14,
1997 (SEC File No. 33-45838-C).
Registration Rights Agreement dated March 31, 1997 among
Beacon Capital Investment, Inc. and Certain Option and
Warrant Holders (EXHIBIT NO. 10). 28
Financial Data Schedule (EXHIBIT NO. 27) 47
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<PAGE>
EXHIBIT NO. 10
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is entered
into as of March 31, 1997 by and among Beacon Capital Investment, Inc., a
Delaware corporation (the "Company"), and the individuals and
companies listed on Exhibit A hereto (the "Holders").
BACKGROUND
----------
A. The Company and certain of its shareholders and Millennium
Memory, Inc., a California corporation ("Millennium"), and certain of
its shareholders are parties to that certain Agreement and Plan of
Merger dated as of December 31, 1996 (the "Merger Agreement").
B. Pursuant to the Merger Agreement, Millennium's shareholders
will acquire shares of the Company's Common Stock, many of which will
be freely tradable shortly following the effective date (the "Effective
Date") of the Merger under Rule 145 of the Securities and Exchange
Commission (the "SEC"). Much of the Company's outstanding Common Stock
is also freely tradable.
C. The Holders own or will be issued in connection with the
Merger options or warrants to purchase shares of the Company's Common
Stock (as more fully described in Exhibit A hereto (the "Shares")).
Those options and warrants and the underlying shares have been or will
be issued without registration under the 1933 Act (as defined below)
and, therefore, the resale thereof by the Holders of any Shares will be
subject to restrictions under the 1933 Act.
D. The Company has previously granted or agreed to grant to
certain of the Holders the right to have the Company register the
Shares underlying their options and warrants for sale under the
1933 Act. Moreover, the obligations of the parties under the Merger
Agreement is subject to the condition that the Company and the Holders
enter into this Agreement prior to the Effective Date to provide for
registration rights with respect to the Shares in accordance with the
terms and conditions set forth in this Agreement.
AGREEMENT
---------
In consideration of the mutual covenants and agreements set forth
herein, and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree
as follows:
1. DEFINITIONS.
1.1 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the meanings specified with respect thereto below:
- 1 -
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<PAGE>
"COMMISSION" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering
the 1933 Act.
"COMMON STOCK" shall mean the common stock, par value $0.01,
of the Company.
"COMPANY" shall have the meaning set forth in the preamble of
this Agreement.
"DEMAND REGISTRATION" shall have the meaning specified in
SECTION 2.1.
"HOLDER" shall mean those parties listed on Exhibit A hereto.
"1933 ACT" shall mean the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder, all as
the same shall be in effect at the time.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"OTHER HOLDER NOTICE" shall have the meaning specified in
SECTION 2.1.
"OTHER SHAREHOLDERS WITH REGISTRATION RIGHTS" shall mean any
shareholders of the Company other than Holders of Registrable
Securities who have registration rights which have been granted by
the Company in compliance with SECTION 6.1 hereof.
"PIGGY-BACK REGISTRATION" shall have the meaning specified in
SECTION 2.2.
"REGISTRABLE SECURITIES" shall mean, collectively, the Shares
and any securities issued or issuable upon any stock dividend,
stock split, recapitalization, merger, consolidation or similar
event with respect to the Shares. As to any particular
Registrable Securities, such securities shall cease to be
Registrable Securities when (i) a registration statement covering
such securities shall have become effective under the 1933 Act and
such securities shall have been disposed of in accordance with
such registration statement, (ii) such securities shall have been
distributed to the public pursuant to Rule 144, Rule 144A or
Rule 145 (or any successor provisions) under the 1933 Act,
(iii) the Holder of such securities, together with all other
persons with whom such Holder would be required to aggregate sales
under Rule 144 (or any successor provision) holds less than 4% of
the outstanding shares of Common Stock of the Company and is free
to sell such securities without volume limitation under
Rule 144(k) (or any successor provision), or (iv) such securities
shall have ceased to be outstanding.
- 2 -
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<PAGE>
"SELLING HOLDER" shall mean a Holder who is selling
Registrable Securities pursuant to a registration statement under
the 1933 Act.
"SHARES" shall have the meaning set forth in the recitals of
this Agreement.
"UNDERWRITER" shall mean a securities dealer who purchases
any Registrable Securities as principal in an underwritten
offering and not as part of such dealer's market-making
activities.
2. REGISTRATION RIGHTS.
2.1 DEMAND REGISTRATION.
(a) REQUEST FOR REGISTRATION. At any time and from time to
time on or after the second anniversary of the date of this Agreement,
any Holder or Holders owning, individually or in the aggregate,
Registrable Securities representing not less than 50% of the
outstanding Shares may make a written request for registration under
the 1933 Act of all or part of its or their Registrable Securities (a
"Demand Registration"), subject to the provisions of SECTION 2.1(f)
pursuant to which the Company has a one-time right to convert such
Demand Registration into a Piggy-Back Registration; PROVIDED, HOWEVER,
that no request for a Demand Registration may be made within 180 days
of the date on which the Company has closed an underwritten public
offering of Common Stock. The Company shall only be obligated to
effect one Demand Registration under this SECTION 2.1. Such request
for a Demand Registration must specify the number of shares of
Registrable Securities proposed to be sold and must also specify the
intended method of disposition thereof. The Company shall give written
notice of such registration request within 10 days after the receipt
thereof to all other Holders of Registrable Securities, if any. Within
10 days after receipt of such notice by any Holder of Registrable
Securities, such Holder may request in writing that all or any of such
Holder's Registrable Securities be included in such registration and
the Company shall, subject to the cut-back provisions of
SECTION 2.1(d), include in the Demand Registration the Registrable
Securities of any such Holder requested to be so included. Each such
request by such other Holders (each, an "Other Holder Notice") shall
specify the number of shares of Registrable Securities proposed to be
sold and the intended method of disposition thereof.
(b) EFFECTIVE REGISTRATION. A registration will not count
as a Demand Registration until it has become effective and has remained
effective until all the securities covered by such registration
statement have been sold or withdrawn (which period shall not exceed
the period required to satisfy the prospectus delivery requirements of
the federal securities laws, in the case of an underwritten offering,
and nine months, in the case of any other offering).
- 3 -
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<PAGE>
(c) UNDERWRITTEN OFFERING. If the Holder or Holders
initiating a Demand Registration so elect, the offering of such
Registrable Securities pursuant to such Demand Registration shall be in
the form of an underwritten offering. The Holder or Holders par-
ticipating in the Demand Registration shall select one or more firms of
investment bankers, which investment bankers must be reasonably
acceptable to the Company, to act as the managing Underwriter or
Underwriters in connection with such offering and shall select any
additional managers, which additional managers must also be reasonably
acceptable to the Company, to be used in connection with the offering.
(d) REDUCTION OF OFFERING. If the managing Underwriter or
Underwriters for a Demand Registration that is to be an underwritten
offering advises the Company and the Holder or Holders requesting the
Demand Registration, in writing, that the dollar amount or number of
shares of Registrable Securities and other shares of Common Stock or
securities to be included in the offering exceeds the maximum dollar
amount or number that can be sold in such offering without adversely
affecting the proposed offering price, the timing, the distribution
method or the probability of success of such offering (the "Maximum
Number of Shares"), then the Company shall include in such
registration: (i) first, the Registrable Securities as to which
registration has been requested which can be sold without exceeding the
Maximum Number of Shares (allocated, in the event two or more Holders
of Registrable Securities have requested to have their Registrable
Securities included in such offering, pro rata among such Holders, as
nearly as practicable, on the basis of the number of shares of
Registrable Securities requested by each such Holder to be included in
such offering), (ii) second, to the extent the Maximum Number of Shares
has not been reached under the foregoing clause (i), the shares of
Common Stock or other securities that the Company proposes to sell
which can be sold without exceeding the Maximum Number of Shares, and
(iii) third, to the extent the Maximum Number of Shares has not been
reached under the foregoing clauses (i) and (ii), the shares of Common
Stock or other securities requested to be included by Other
Shareholders With Registration Rights which can be sold without
exceeding the Maximum Number of Shares (allocated pro rata among such
Other Shareholders With Registration Rights, as nearly as practicable,
on the basis of the number of shares of Common Stock or other
securities requested by Other Shareholders With Registration Rights to
be included in such offering).
(e) WITHDRAWAL. If any Holder of Registrable Securities
requesting registration disapproves of the terms of any underwriting or
is not entitled to include all of such Holder's Registrable Securities
in any offering, it may elect to withdraw from such offering by giving
written notice to the Company and the Underwriter of its request to
withdraw prior to the effectiveness of the registration statement. If,
by the withdrawal of such Registrable Securities, a greater number of
shares of Registrable Securities, held by other Holders of Registrable
Securities, may be included in such registration (up to the maximum of
any limitation imposed by the Underwriter), then the Company shall
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offer to all Holders of Registrable Securities who have included
Registrable Securities in the registration, the right to include
additional shares of Registrable Securities in the same proportion used
in determining the limitation imposed by the provisions of
SECTION 2.1(D). If all of the Holders of Registrable Securities which
have requested to be included in a Demand Registration withdraw from
any proposed offering and, as a result, the registration statement is
withdrawn prior to being declared effective, such request shall either
(i) count as a Demand Registration provided for in SECTION 2.1, or
(ii) not count as a Demand Registration if the withdrawing Holders pay
their pro rata share (based on the number of shares initially proposed
to be included in such registration statement) of the expenses incurred
by the Company in connection with such registration statement.
(f) COMPANY RIGHT TO CONVERT DEMAND REGISTRATION INTO A
PIGGY-BACK REGISTRATION ON COMPANY PUBLIC OFFERING. The provisions of
this SECTION 2.1 notwithstanding, in the event of a request for a
Demand Registration by Holders of Registrable Securities pursuant to
SECTION 2.1 hereof, the Company may, by giving written notice within 10
days after the receipt of such registration request to the Holder or
Holders making such request, elect to effect an underwritten public
offering of Common Stock for its own account rather than effect the
requested Demand Registration, in which an event, the registration will
be deemed to be a Piggy-Back Registration pursuant to SECTION 2.2
hereof and will not count as a Demand Registration; PROVIDED, HOWEVER,
that the provisions of SECTION 2.2(b)(i) notwithstanding, as a
condition precedent to such right to convert the Demand Registration
into a Piggy-Back Registration, the Holders of Registrable Securities
desiring to participate in such offering must be permitted to include
Registrable Securities in such Piggy-Back Registration on a pro rata
basis with the Company in an amount equal to not less than 25% of the
total number of shares being registered (including the over-allotment
option) and provided further, that in the event (i) the registration
statement relating to such Piggy-Back Registration has not been filed
with the Commission within the time period permitted for the filing of
a registration statement relating to a Demand Registration for an
initial public offering as set forth in SECTION 3.1(a), (ii) the
registration statement filed by the Company is not declared effective
within 90 days after filing, or (iii) the Holders of Registrable
Securities are not permitted to include shares of Registrable
Securities in such offering equal to not less than 25% of the total
number of shares being registered, then, in any such case, the Holders
of Registrable Securities shall have the right to proceed with the
Demand Registration.
2.2 PIGGY-BACK REGISTRATION.
(a) PIGGY-BACK RIGHTS. If at any time the Company proposes
to file a registration statement under the 1933 Act with respect to an
offering of equity securities, or securities convertible or
exchangeable into equity securities, by the Company for its own account
or for the account of any Other Shareholders With Registration Rights,
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other than a registration statement (i) on Form S-4 or S-8 (or any
substitute or successor form that may be adopted by the Commission),
(ii) filed in connection with any employee stock option or other
benefit plan, (iii) for an exchange offer or offering of securities
solely to the Company's existing shareholders, or (iv) for a dividend
reinvestment plan, then the Company shall:
(A) give written notice of such proposed filing to the
Holders of Registrable Securities as soon as practicable but in no
event less than 30 days before the anticipated filing date, which
notice shall describe the amount and type of securities to be included
in such offering, the intended method(s) of distribution, and the name
of the proposed managing Underwriter or Underwriters, if any, of the
offering; and
(B) offer in such notice to the Holders of Registrable
Securities the opportunity to register such number of shares of
Registrable Securities as each such Holder may request in writing
within 10 days following receipt of such notice (a "Piggy-Back
Registration"). The Company shall cause such Registrable Securities to
be included in such registration and shall use its best efforts to
cause the managing Underwriter or Underwriters of a proposed
underwritten offering to permit the Registrable Securities requested to
be included in a Piggy-Back Registration to be included on the same
terms and conditions as any similar securities of the Company and to
permit the sale or other disposition of such Registrable Securities in
accordance with the intended method of distribution thereof.
(b) REDUCTION OF OFFERING. Except as otherwise provided in
SECTION 2.1(f), if the managing Underwriter or Underwriters for a
Piggy-Back Registration that is to be an underwritten offering advises
the Company and the Holders requesting inclusion in the Piggy-Back
Registration, in writing, that the dollar amount or number of shares of
Registrable Securities and other shares of Common Stock or securities
to be included in the offering exceeds the Maximum Number of Shares,
then the Company shall include in such registration: (i) first, the
shares of Common Stock or other securities that the Company proposes to
sell which can be sold without exceeding the Maximum Number of Shares;
(ii) second, to the extent the Maximum Number of Shares has not been
reached under the foregoing clause (i), the Registrable Securities as
to which registration has been requested by the Holders of Registrable
Securities which can be sold without exceeding the Maximum Number of
Shares (allocated pro rata among such Holders of Registrable
Securities, as nearly as practicable, on the basis of the number of
shares of Registrable Securities requested to be included in such
offering by the Holders of Registrable Securities); PROVIDED, HOWEVER,
that in the event Troy D. Barnes requests to include shares of Common
Stock in such registration and the Underwriter determines that the
inclusion of shares of Common Stock by Troy D. Barnes will not
adversely affect the proposed offering price, the timing, the
distribution method or the probability of success of such offering,
then Mr. Barnes shall also be permitted to sell shares of Common Stock,
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<PAGE>
pro rata. with the Holders of Registrable Securities, as nearly as
practicable, on the basis of the number of shares which each
desires to include in such registration, pursuant to this clause (ii),
and (iii) third, to the extent the Maximum Number of Shares has not been
reached under the foregoing clauses (i) and (ii), the shares of Common
Stock or other securities requested to be included in such registration
by Other Shareholders With Registration Rights which can be sold without
exceeding the Maximum Number of Shares (allocated pro rata among Other
Shareholders With Registration Rights, as nearly as practicable, on the
basis of the number of shares of Common Stock or other securities
requested to be included in such offering by such Other Shareholders With
Registration Rights).
(c) WITHDRAWAL. Any Holder may elect to withdraw its request
for inclusion of its Registrable Securities in any Piggy-Back
Registration by giving written notice to the Company of its request to
withdraw prior to the effectiveness of the registration statement. The
Company may also elect to withdraw a Piggy-Back Registration at any time
prior to the effectiveness of the registration statement, and such
withdrawal shall not require the consent of any Holder of Registrable
Securities included therein.
3. REGISTRATION PROCEDURES
3.1 FILINGS; INFORMATION. If and whenever the Company is required
to effect the registration of any Registrable Securities under the
1933 Act pursuant to SECTION 2.1 or 2.2 of this Agreement, the Company
shall use its best efforts to effect the registration and the sale of
such Registrable Securities in accordance with the intended method of
disposition thereof as expeditiously as practicable, and in connection
with any such request:
(a) FILING REGISTRATION STATEMENT. The Company shall, as
expeditiously as possible, prepare and, in the case of a Demand
Registration pursuant to SECTION 2.1 within 90 days after receipt of the
initial request for such registration, file with the Commission a
registration statement on any form for which the Company then qualifies
or which counsel for the Company shall deem appropriate and which form
shall -be available for the sale of the Registrable Securities to be
registered thereunder in accordance with the intended method of
distribution thereof, and use its best efforts to cause such filed
registration statement to become and remain effective; PROVIDED, HOWEVER,
that if it is not practicable to meet the filing requirements for filing
such registration statement within such 90-day period, such 90-day period
can be further extended by an additional 30 days with the written consent
of the Holders of more than 51% of the Registrable Securities requested
to be included in such offering, which consent shall not be unreasonably
withheld. The foregoing notwithstanding, in the case of a Demand
Registration pursuant to SECTION 2.1, the Company may, on one occasion
(but not more than one occasion during the term of this Agreement),
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postpone its obligation to file a registration statement for up to a
maximum of 90 days in the event the Board of Directors determines in good
faith that, for bona fide business reasons or legal restrictions (and, if
such determination is based on legal restrictions, the Board shall have
obtained written advice confirming such restrictions from outside legal
counsel), it is either desirable or necessary to so postpone such filing.
Upon the expiration of such postponement period, the Company shall again
proceed with the preparation and filing of the required registration
statement and such postponement shall not otherwise affect any rights of
any Holder of Registrable Securities hereunder.
(b) COPIES. The Company shall, prior to filing a registration
statement or prospectus or any amendment or supplement thereto, furnish
without charge to each Selling Holder of the Registrable Securities
covered by such registration statement and legal counsel for any such
Selling Holder, copies of such registration statement as proposed to be
filed, each amendment and supplement to such registration statement (in
each case including all exhibits thereto and documents incorporated by
reference therein), the prospectus included in such registration
statement (including each preliminary prospectus), and such other
documents as such Selling Holder may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such
Selling Holder.
(c) AMENDMENTS AND SUPPLEMENTS. The Company shall prepare and
file with the Commission such amendments, including post-effective
amendments, and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective and in compliance with the provisions of
the 1933 Act until all Registrable Securities and other securities
covered by such registration statement have been disposed of in
accordance with the intended methods of disposition set forth in such
registration statement (which period shall not exceed the period required
to satisfy the prospectus delivery requirements of the federal securities
laws, in the case of an underwritten offering, and nine months, in the
case of any other offering) or such securities have been withdrawn.
(d) NOTIFICATION. After the filing of the registration
statement, the Company shall promptly notify each selling Holder, and
confirm such advice in writing, (i) when such registration statement
becomes effective, (ii) when any post-effective amendment to such
registration statement becomes effective, (iii) of any stop order issued
or threatened by the Commission (and the Company shall take all
reasonable actions required to prevent the entry of such a stop order or
to remove it if entered) and (iv) of any request by the Commission for
any amendment or supplement to such registration statement, of any
prospectus relating thereto or for additional information or of the
occurrence of an event requiring the preparation of a supplement or
amendment to such prospectus so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus will not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
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<PAGE>
statements therein not misleading and promptly make available to each
Selling Holder any such supplement or amendment; except that before
filing with the Commission a registration statement or prospectus or any
amendment or supplement thereto, including documents incorporated by
reference, the Company shall furnish to each Selling Holder and to legal
counsel representing any Selling Holder, copies of all such documents
proposed to be filed sufficiently in advance of filing to provide such
Selling Holders, Underwriters and legal counsel with a reasonable
opportunity to review such documents and comment thereon, and the Company
shall not file any registration statement or prospectus or amendment or
supplement thereto, including documents incorporated by reference, to
which such Selling Holders or legal counsel shall reasonably object on a
timely basis in light of the requirements of the 1933 Act or any other
applicable laws and regulations.
(e) STATE SECURITIES LAWS COMPLIANCE. The Company shall use
its best efforts to (i) register or qualify the Registrable Securities
covered by the registration statement under such securities or blue sky
laws of such jurisdictions in the United States as any Selling Holder (in
light of such Selling Holder's intended plan of distribution) requests
and (ii) cause such Registrable Securities covered by the registration
statement to be registered with or approved by such other governmental
agencies or authorities in the United States as may be necessary by
virtue of the business and operations of the Company and do any and all
other acts and things that may be necessary or advisable to enable such
Selling Holder to consummate the disposition of the Registrable
Securities owned by such Selling Holder in such jurisdictions; PROVIDED,
HOWEVER, that the Company shall not be required to qualify generally to
do business in any jurisdiction where it would not otherwise be required
to qualify but for this paragraph (e), or subject itself to taxation in
any such jurisdiction.
(f) AGREEMENTS FOR DISPOSITION. The Company shall enter into
customary agreements (including, if applicable, an underwriting agreement
in customary form) and take such other actions as are reasonably required
in order to expedite or facilitate the disposition of such Registrable
Securities. The Selling Holders may, at their option, require that any
or all of the representations, warranties and covenants of the Company in
any underwriting agreement to or for the benefit of any Underwriters also
be made to and for the benefit of the Selling Holders.
(g) COOPERATION. The Chief Executive Officer of the Company
and the Chief Financial Officer of the Company and other members of the
management of the Company shall cooperate fully in any offering of
Registrable Securities hereunder, which cooperation shall include,
without limitation, the preparation of the Registration Statement and all
other offering materials and related documents, and participation in
meetings with Underwriters, attorneys, accountants and potential
investors.
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<PAGE>
(h) RECORDS. The Company shall make available for inspection
by any Selling Holder, any Underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or
other professional retained by any such Selling Holder or Underwriter
(collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be necessary to enable them to
exercise their due diligence responsibility, and cause the Company's
officers, directors and employees to supply all information reasonably
requested by any Inspectors in connection with such registration
statement.
(i) OPINIONS AND COMFORT LETTERS. The Company shall furnish
to each Selling Holder a signed counterpart, addressed to such Selling
Holder, of (i) any opinion of counsel to the Company delivers to any
Underwriter and (ii) any comfort letter from the Company's independent
public accountants delivered to any Underwriter.
(j) EARNINGS STATEMENT. The Company shall comply with all
applicable rules and regulations of the Commission and the 1933 Act, and
make available to its shareholders, as soon as practicable, an earnings
statement covering a period of 12 months, beginning within three months
after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of SECTION 11(a) of the 1933 Act
and Rule 158 thereunder.
(k) LISTING. The Company shall use its best efforts to cause
all such Registrable Securities to be listed on such exchanges or
otherwise designated for trading in the same manner as similar securities
issued by the Company are then listed or designated.
3.2 SELLING HOLDER'S OBLIGATION TO SUSPEND DISTRIBUTION. Each
Selling Holder agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in
SECTION 3.1(d)(iv), such Selling Holder will forthwith discontinue
disposition of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until such Selling
Holder's receipt of the copies of the supplemented or amended prospectus
contemplated by SECTION 3.1(d)(iv), and, if so directed by the Company,
such Selling Holder will deliver to the Company all copies, other than
permanent file copies then in such Selling Holder's possession, of the
most recent prospectus covering such Registrable Securities at the time
of receipt of such notice. In the event the Company shall give such
notice, the Company shall extend the period during which such
registration statement shall be maintained effective by the number of
days during the period from and including the date of the giving of
notice pursuant to SECTION 3.1(d)(iv) to the date when the Company shall
make available to the Selling Holders of Registrable Securities covered
by such registration statement a prospectus supplemented or amended to
conform with the requirements SECTION 3.1(d)(iv).
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<PAGE>
3.3 REGISTRATION EXPENSES. Except as otherwise provided in the
final sentence of SECTION 2.1(e), the Company shall pay all expenses
incurred in connection with any Demand Registration pursuant to
SECTION 2.1 and any Piggy-Back Registration pursuant to SECTION 2.2, and
all expenses incurred in performing or complying with the Company's
obligations under this SECTION 3, whether or not the registration
statement becomes effective, in each case including, but not limited to:
(i) all registration and filing fees, (ii) fees and expenses of
compliance with securities or blue sky laws (including fees and
disbursements of counsel in connection with blue sky qualifications of
the Registrable Securities), (iii) printing expenses, (iv) the Company's
internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting
duties), (v) the fees and expenses incurred in connection with the
listing of the Registrable Securities as required by SECTION 3.1(k),
(vi) National Association of Securities Dealers, Inc. fees, (vii) fees
and disbursements of counsel for the Company and fees and expenses for
independent certified public accountants retained by the Company
(including the expenses or costs associated with the delivery of any
opinions or comfort letters requested pursuant to SECTION 3.1(i)),
(viii) the fees and expenses of any special experts retained by the
Company in connection with such registration, and (ix) all reasonable
fees and expenses incurred by the Selling Holders in connection with
their participation in such registration, including, without limitation,
the reasonable fees and expenses of one legal counsel, and any
accountants and other experts for, and chosen by, a majority in interest
of the Selling Holders. The Company shall have no obligation to pay any
underwriting fees, discounts or selling commissions attributable to the
Registrable Securities being sold by the Selling Holders, which expenses
shall be borne by the Selling Holders.
4. INDEMNIFICATION AND CONTRIBUTION.
4.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless each Selling Holder, its officers, directors,
partners, members and agents, and each person, if any, who controls such
Selling Holder within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act from and against any loss, claim, damage or
liability and any action in respect thereof to which such Selling Holder,
its officers, directors, partners, members or agents, and any such
controlling person may become subject under the 1933 Act or the 1934 Act
or any other statute or common law, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (a) any untrue
statement or alleged untrue statement of a material fact made in
connection with the sale of Registrable Securities in any registration
statement or prospectus relating to the Registrable Securities (as
amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or any preliminary prospectus, (b) any
omission or alleged omission to state a material fact required to be
stated in any registration statement or prospectus or necessary to make
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<PAGE>
the statements therein not misleading, or (c) any violation by the
Company of any federal, state or common law, rule or regulation
applicable to the Company and relating to action required of or inaction
by the Company in connection with such registration.
The indemnity agreement contained in this SECTION 4.1 shall not
apply to amounts paid in settlement of any such loss, claim, damage or
liability or any action in respect thereof if such settlement is effected
without the consent of the Company (which consent shall not be
unreasonably withheld); nor shall the Company be liable to any Selling
Holder or its officers, directors, partners, members or agents in any
such case for any loss, claim, damage, liability or any action in respect
thereof to the extent that it arises solely from or is based solely upon
and is in conformity with written information relating to such Selling
Holder furnished expressly for use in connection with such registration
by such Selling Holder or its agents, nor shall the Company be liable to
any Selling Holder for any such loss, claim, damage or liability or any
action in respect thereof to the extent it arises solely from or is based
solely upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or prospectus
relating to the Registrable Securities delivered by such Selling Holder
after the Company has provided written notice to such Selling Holder that
such registration statement or prospectus contained such untrue statement
or alleged untrue statement of a material fact, (ii) any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading after
the Company has provided written notice to such Selling Holder that such
registration statement or prospectus contained such omission or alleged
omission, or (iii) the failure of such Selling Holder to deliver any
preliminary or final prospectus, or any amendments or supplements
thereto, required under applicable securities laws, including the
1933 Act, to be so delivered.
4.2 INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. Each
Selling Holder shall indemnify and hold harmless the Company, its
officers, directors, partners, members and agents and each person, if
any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act to the same extent as the
foregoing indemnity from the Company to such Selling Holder, but solely
with reference to information in conformity with and related to such
Selling Holder furnished in writing by such Selling Holder expressly for
use in any registration statement or prospectus relating to the
Registrable Securities, or any amendment or supplement thereto, or any
preliminary prospectus. Each Selling Holder shall also indemnify and
hold harmless any Underwriter of the Registrable Securities, their
officers, directors, partners, members and agents and each person who
controls such Underwriters on substantially the same basis as that of the
indemnification of the Company provided in this SECTION 4.2.
Notwithstanding the foregoing, the total amount for which any Selling
Holder shall be liable under this SECTION 4.2 shall not in any event
exceed the aggregate proceeds received by such Selling Holder from the
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sale of the Registrable Securities of such Selling Holder to which such
registration statement or prospectus, including any amendment or
supplement thereto, relates.
4.3 CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt
by any person of any notice of any loss, claim, damage or liability or
any action in respect of which indemnity may be sought pursuant to
SECTION 4.1 or 4.2, such person (the "Indemnified Party") shall, if a
claim in respect thereof is to be made against any other person for
indemnification hereunder, notify such other person (the "Indemnifying
Party") in writing of the loss, claim damage, liability or action;
PROVIDED, HOWEVER, that the failure by the Indemnified Party to notify
the Indemnifying Party shall not relieve the Indemnifying Party from any
liability which the Indemnifying Party may have to such Indemnified Party
hereunder. If the Indemnified Party is seeking Indemnification with
respect to any claim or action brought against the Indemnified Party,
then the Indemnifying Party shall be entitled to participate in such
claim or action, and, to the extent that it wishes, jointly with all
other Indemnifying Parties, to assume the defense thereof with counsel
satisfactory to the Indemnified Party. After notice from the
Indemnifying Party to the Indemnified Party of its election to assume the
defense of such claim or action, the Indemnifying Party shall not be
liable to the Indemnified Party for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the
defense thereof other than reasonable costs of investigation; PROVIDED,
HOWEVER, that in any action in which both the Indemnified Party and the
Indemnifying Party are named as defendants, the Indemnified Party shall
have the right to employ separate counsel (but no more than one such
separate counsel) to represent the Indemnified Party and its controlling
persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by the Indemnified Party against
the Indemnifying Party, with the fees and expenses of such counsel at the
expense of such Indemnifying Party if, based upon the written opinion of
counsel of such Indemnified Party, representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, consent to entry of judgment or
effect any settlement of any claim or pending or threatened proceeding in
respect of which the Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party,
unless such judgment or settlement includes an unconditional release of
such Indemnified Party from all liability arising out of such claim or
proceeding.
4.4 CONTRIBUTION. If the indemnification provided for in the
foregoing SECTIONS 4.1, 4.2 and 4.3 is unavailable to any Indemnified
Party in respect of any loss, claim, damage, liability or action referred
to herein, then each such Indemnifying Party, in lieu of indemnifying
such Indemnified Party, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such loss, claim, damage, liability
or action in such proportion as is appropriate to reflect the relative
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fault of the Indemnified Parties and the Indemnifying Parties in
connection with the actions or omissions which resulted in such loss,
claim, damage, liability or action, as well as any other relevant
equitable considerations. The relative fault of any Indemnified Party
and any Indemnifying Party shall be determined by reference to, among
other things, whether the untrue or alleged-untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by such Indemnified Party or such
Indemnifying Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this SECTION 4.4 were determined by pro rata
allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an Indemnified Party
as a result of any loss, claim, damage, liability or action referred to
in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
incurred by such Indemnified Party in connection with investigating or
defending any such action or claim. No person guilty of fraudulent mis-
representation (within the meaning of Section 11(f) of the 1933 Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
5. UNDERWRITING AND DISTRIBUTION.
5.1 RULE 144. The Company shall file any reports required to be
filed by it under the 1933 Act and the 1934 Act and shall take such
further action as any Holder may reasonably request, all to the extent
required from time to time to enable Holders to sell Registrable
Securities without registration under the 1933 Act within the limitation
of the exemptions provided by Rule 144 or Rule 144A under the 1933 Act,
as such Rules may be amended from time to time, or any similar Rule or
regulation hereafter adopted by the Commission. Upon the request of any
Holder, the Company will deliver to such Holder a written statement as to
whether it has complied with such requirements.
5.2 RESTRICTIONS ON SALE BY THE COMPANY AND OTHERS. The Company
agrees (i) not to effect any sale or distribution of any securities
similar to those being registered in accordance with SECTION 2.1, or any
securities convertible into or exchangeable or exercisable for such
securities, during the 14 days prior to, and during the 120-day period
beginning on, the effective date of any registration statement (except as
part of such registration statement); and (ii) that any agreement entered
into after the date hereof pursuant to which the Company issues or agrees
to issue any privately placed securities shall contain a provision under
which holders of such securities agree not to effect any sale or
distribution of any such securities during the periods described in (i)
above, in each case including a sale pursuant to Rule 144 or 144A under
the 1933 Act (except as part of any such registration, if permitted);
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PROVIDED, HOWEVER that the provisions of this SECTION 5.2 shall not
prevent the conversion or exchange of any warrants, options or other
securities pursuant to their terms into or for other securities and shall
not prevent the issuance of securities by the Company under any employee
benefit, stock option or stock or stock subscription plans.
5.3 AGREEMENT BY HOLDERS OF REGISTRABLE SECURITIES. The Holders of
Registrable Securities, by their acceptance thereof, agree that, upon
request, in connection with any underwritten public offering by the
Company, they will enter "lock-up" agreements, in customary form,
pursuant to which they will agree not to effect any sale or distribution
of any securities similar to those being registered by the Company, or
any securities convertible into or exchangeable or exercisable for such
securities, including a sale pursuant to Rule 144 or 144A under the
1933 Act, during the 14 days prior to, and during the 120-day period
beginning on, the effective date of the registration statement relating
to such offering (except as part of such registration statement);
PROVIDED, HOWEVER that the obligation of the Holders of Registrable
Securities to execute such lock-up agreements is subject to the execution
of similar agreements by all of the officers and directors of the Company
who hold shares of Common Stock or options or other securities
exercisable or convertible for or into shares of Common Stock.
6. MISCELLANEOUS
6.1 NO INCONSISTENT OR SUPERIOR REGISTRATION RIGHTS. From and
after the date of this Agreement, the Company shall not (i) enter into
any agreement granting registration rights with respect to the Common
Stock or other securities which are inconsistent with or superior to the
rights granted to the Holders of Registrable Securities hereunder or
(ii) amend any agreement in effect as of the date hereof which grants
registration rights to any other person or entity so as to cause such
registration rights to be inconsistent with those granted to the Holders
of Registrable Securities hereunder or to otherwise adversely affect the
registration rights granted to the Holders of Registrable Securities
hereunder.
6.2 SUCCESSORS AND ASSIGNS. The rights and obligations of Holders
under this Agreement shall be freely assignable in connection with any
assignment of Registrable Securities. Any assignee of such rights shall,
upon agreeing to assume the obligations of a Holder of Registrable
Securities hereunder, be entitled to all of the benefits of this
Agreement as if such assignee were an original party hereto. The rights
and obligations of the Company hereunder may not be assigned.
6.3 ENTIRE AGREEMENT. This Agreement constitutes the full and
entire agreement and understanding between Holders and the Company, and
supersedes all prior agreements and understandings, relating to the
subject matter hereof. All Demand, Piggy-Back or other Registration
- 15 -
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<PAGE>
Rights previously granted by the Company to any Holder are hereby
terminated and superseded by those granted in this Agreement.
6.4 NOTICES. All notices, requests, demands and other
communications which are required or may be given under this Agreement
shall be in writing and shall be deemed to have been duly given if
transmitted by telecopier with receipt acknowledged, or upon- delivery,
if delivered personally or by recognized commercial courier with receipt
acknowledged, or upon the expiration of 72 hours after mailing, if mailed
by registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Company at:
31642 South Coast Highway, Suite 100
Laguna Beach, California 92699
Attention: Secretary
(b) If to any other Holder of Registrable Securities, at
such Holder's address as shown on the books of the
Company.
or at such other address or addresses as Holder or the Company, as the
case may be, may specify by written notice given in accordance with this
SECTION 6.4.
6.5 SEVERABILITY. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
6.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
6.7 DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Agreement are for convenience of reference only and do
not constitute a part of this Agreement and are not to be considered in
construing or interpreting this Agreement.
6.8 WAIVERS AND AMENDMENTS. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated orally
or by course of dealing, but only by a statement in writing signed by the
party against which enforcement of the change, waiver, discharge or
termination is sought. The foregoing notwithstanding, in the event there
are two or more Holders at any time, any amendment of this Agreement
executed by Holders who own or are entitled to purchase more than 51% of
the Registrable Securities shall be binding on all Holders.
6.9 REMEDIES. In the event that any party fails to observe or
perform any covenant or agreement to be observed or performed under this
- 16 -
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<PAGE>
Agreement, each other party may proceed to protect and enforce its rights
by suit in equity or action at law, whether for specific performance of
any term contained in this Agreement or for an injunction against the
breach of any such term or in aid of the exercise of any power granted in
this Agreement or to enforce any other legal or equitable right of such
party, or to take any one or more of such actions. In the event of such
an action, each party in such dispute shall bear its own fees, costs, and
expenses, including without limitation, fees and expenses of attorneys
and accountants, and all fees, costs and expenses of appeals. None of
the rights, powers or remedies conferred under this Agreement shall be
mutually exclusive; and each such right, power or remedy shall be
cumulative and in addition to any other right, power or remedy whether
conferred by this Agreement or now or hereafter available at law, in
equity, by statute or otherwise.
6.10 GOVERNING LAW. This Agreement shall be construed and enforced
in accordance with, and the rights of the parties hereto shall be
governed by, the laws of the State of California applicable to agreements
made in and to be performed in the State of California; provided,
however, that in the event that any California law or laws requires or
permits the application of the laws of any other jurisdiction, such
- 17 -
-44-
<PAGE>
California law or laws shall be disregarded with the result that the
remaining laws of the State of California shall nonetheless be applied.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed and delivered as of the date first above written.
The "Company" The "Holders"
BEACON CAPITAL INVESTMENT, INC. Coast Business Credit, a division
of Southern Pacific Thrift & Loan
Association
By: /s/ Douglas P. Morris
-----------------------------
Its: President By: /s/ Craig Taylor
---------------------- ------------------------------
[Printed Name and Title] Its: Vice President
------------------------
[Printed Name and Title]
ACAP Financial, Inc.
By: /s/ Kirk Ferguson
------------------------------
Its: President
------------------------
[Printed Name and Title]
/s/ Douglas P. Morris
---------------------------------
Douglas P. Morris, an individual
/s/ Kirk Ferguson
---------------------------------
Kirk Ferguson, an individual
- 18 -
-45-
<PAGE>
EXHIBIT A
Douglas P. Morris
Coast Business Credit, a division of Southern Pacific Thrift & Loan
Association
Kirk Ferguson
ACAP Financial, Inc.
- 19 -
-46-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 75,898
<SECURITIES> 0
<RECEIVABLES> 10,267,480
<ALLOWANCES> 135,000
<INVENTORY> 623,038
<CURRENT-ASSETS> 11,115,969
<PP&E> 61,009
<DEPRECIATION> 26,982
<TOTAL-ASSETS> 11,225,554
<CURRENT-LIABILITIES> 7,582,900
<BONDS> 0
0
0
<COMMON> 7,243
<OTHER-SE> 3,303,514
<TOTAL-LIABILITY-AND-EQUITY> 11,225,554
<SALES> 12,577,744
<TOTAL-REVENUES> 12,577,744
<CGS> 11,373,611
<TOTAL-COSTS> 12,201,545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151,233
<INCOME-PRETAX> 243,737
<INCOME-TAX> (80,944)
<INCOME-CONTINUING> 324,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324,681
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
