<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1997
REGISTRATION NO. 333-26715
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QUIETPOWER SYSTEMS, INC.
(Name of small business issuer as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8980 06-1346524
(State or other jurisdiction of (Primary standard (I.R.S. employer
incorporation or organization) industrial classification identification no.)
code number)
</TABLE>
------------------------
460 WEST 34TH STREET
NEW YORK, NEW YORK 10001
(212) 967-8480
(Address and telephone number of principal executive offices)
------------------------
JONATHAN M. CHARRY, PRESIDENT
QUIETPOWER SYSTEMS, INC.
460 WEST 34TH STREET
NEW YORK, NEW YORK 10001
(212) 967-8480
(Name, address and telephone number of agent for service)
------------------------
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
<TABLE>
<S> <C>
GARY T. MOOMJIAN, ESQ. LAWRENCE B. FISHER, ESQ.
BRESLOW & WALKER, LLP ORRICK, HERRINGTON & SUTCLIFFE LLP
767 THIRD AVENUE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10103
TEL: (212) 832-1930 TEL: (212) 506-5000
FAX: (212) 888-4955 FAX: (212) 506-5151
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _____
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
Units, each consisting of one share of Common Stock, par
value $.01 per share ("Common Stock"), and one
Redeemable Common Stock Purchase Warrant ("Warrants"),
each to purchase one share of Common Stock(2)(3)....... 2,300,000 $9.60 $22,080,000 $6,690.91
Common Stock, par value $.01 per share(4).............. 2,300,000 $9.50 $21,850,000 --
Warrants, each to purchase one share of Common
Stock(4)............................................. 2,300,000 $0.10 $230,000 --
Common Stock, par value $.01 per share(5)................ 2,300,000 $14.25 $32,775,000 $9,931.82
Representative's Warrants, each to purchase one share of
Common Stock and one Warrant(6)........................ 200,000 $0.0001 $20 --
Common Stock, par value $.01 per share(7)................ 200,000 $11.40 $2,280,000 $690.91
Warrants, each to purchase one share of Common
Stock(7)............................................... 200,000 $0.12 $24,000 $7.27
Common Stock, par value $.01 per share(8)................ 200,000 $14.25 $2,850,000 $863.64
Common Stock, par value $.01 per share(9)................ 507,500 $9.50 $4,821,250 $1,460.98
Total.................................................... $64,830,270 $19,645.53
Amount previously paid................................. $19,645.53
Amount owed............................................ 0
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 300,000 shares of Common Stock which the Representative has the
option to purchase to cover over-allotments, if any.
(3) Includes 300,000 Warrants which the Representative has the option to
purchase to cover over-allotments, if any.
(4) Included as part of Units listed above.
(5) Issuable upon exercise of publicly traded Warrants.
(6) This Registration Statement also relates to the resale of these securities
by the holders thereof or their transferees.
(7) Issuable upon exercise of the Representative's Warrants. This Registration
Statement also relates to the resale of these securities by the holders
thereof or their transferees.
(8) Issuable upon exercise of the Warrants underlying the Representative's
Warrants. This Registration Statement also relates to the resale of these
securities by the holders thereof or their transferees.
(9) Represents shares of Common Stock which may be sold by selling stockholders.
See "Selling Stockholders" in the Selling Stockholders' Prospectus.
Pursuant to Rule 416 of the Securities Act of 1933, this Registration
Statement also relates to such additional indeterminate number of shares of
Common Stock as may become issuable by reason of stock splits, dividends and
similar adjustments, in accordance with the anti-dilution provisions of the
publicly traded Redeemable Common Stock Purchase Warrants, the Representative's
Warrants and the Warrants underlying the Representative's Warrants.
<PAGE>
QUIETPOWER SYSTEMS, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM SB-2
<TABLE>
<CAPTION>
ITEM NUMBERS OF FORM SB-2 AND TITLE OF ITEM LOCATION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front Facing Page of Registration Statement; Outside Front
Cover of Prospectus................................ Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus......................................... Prospectus
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6. Dilution............................................. Risk Factors; Dilution
7. Selling Security Holders............................. Concurrent Offering
8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting
9. Legal Proceedings.................................... Business
10. Directors, Executive Officers, Management; Principal Stockholders
Promoters and Control Persons........................
11. Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management................................
12. Description of Securities............................ Description of Securities
13. Interest of Named Experts and Counsel................ Legal Matters; Experts
14. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities.......
15. Organization Within Last Five Years.................. Not Applicable
16. Description of Business.............................. Prospectus Summary; Risk Factors; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business
17. Managements's Discussion and Analysis or Management's Discussion and Analysis of Financial
Plan of Operation.................................... Condition and Results of Operations
18. Description of Property.............................. Business--Facilities
19. Certain Relationships and Related Transactions....... Certain Transactions
20. Market for Common Equity and Related Dividend Policy; Dilution; Description of Securities;
Stockholder Matters.................................. Shares Eligible for Future Sale
21. Executive Compensation............................... Management
22. Financial Statements................................. Financial Statements
23. Changes In and Disagreement with Not Applicable
Accountants on Accounting and Financial
Disclosure.........................................
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
THIS FORM OF PROSPECTUS IS FILED PURSUANT TO RULE 424(A)
AND RELATES TO REGISTRATION NO. 333-
SUBJECT TO COMPLETION, DATED JUNE 17, 1997
PROSPECTUS
QUIETPOWER SYSTEMS, INC.
2,000,000 SHARES OF COMMON STOCK AND
2,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
---------------------
This Prospectus relates to the offering (the "Offering") of 2,000,000 shares
(the "Shares") of common stock, $0.01 par value per share (the "Common Stock"),
and 2,000,000 Redeemable Common Stock Purchase Warrants (the "Warrants") of
QuietPower Systems, Inc., a Delaware corporation ("QuietPower" or the
"Company"). The Shares and Warrants are sometimes hereinafter collectively
referred to as the "Securities." Until the completion of this Offering, the
Shares and Warrants may only be purchased together on the basis of one Share and
one Warrant. Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at an initial exercise price of $ per share [150%
of the initial public offering price per share of Common Stock] at any time
during the period commencing one year after the date of this Prospectus until
five (5) years from the date of this Prospectus. The Warrant exercise price is
subject to adjustment under certain circumstances. Commencing eighteen (18)
months after the date of this Prospectus, with the consent of National
Securities Corporation (the "Representative") (which consent shall not be
unreasonably withheld), the Company may redeem all, but not less than all, of
the Warrants at a price equal to five cents ($0.05) per Warrant, provided that
the average closing sale price of the Common Stock as reported on the American
Stock Exchange ("AMEX") equals or exceeds $ [175% of the then exercise
price per Warrant] (subject to adjustment) for any twenty (20) trading days
within a period of thirty (30) consecutive trading days ending on the fifth (5)
trading day prior to the date of the notice of redemption. See "Description of
Securities--Warrants."
Prior to this Offering, there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that such a market will develop
after the completion of this Offering or, if developed, that it will be
sustained. It is currently anticipated that the initial public offering prices
will be between $7.50 and $9.50 per Share and $0.10 per Warrant. For information
regarding the factors considered in determining the initial public offering
prices of the Shares and Warrants and the terms of the Warrants, see "Risk
Factors" and "Underwriting." It is anticipated that application will made to
include the Shares and Warrants for listing on AMEX and that, when listed, they
will trade separately immediately after the Offering under the symbols "KWT" and
"KWT.WS," respectively.
Concurrently with this offering, 507,500 shares of Common Stock issuable
upon exercise of warrants (the "Private Placement Warrants") issued to investors
(the "Selling Stockholders") in two private placement financings consummated by
the Company in May 1996 and April 1997, respectively, are being registered at
the Company's expense for sale by the Selling Stockholders pursuant to a
separate prospectus. The shares offered by the Selling Stockholders are not part
of the underwritten offering and of such shares, 373,750 may not be offered or
sold prior to three months from the date of this Prospectus, and 133,750 may not
be offered prior to nine months from the date of this Prospectus, without the
prior written consent of the Representative. See "Concurrent Offering."
------------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 8 AND "DILUTION."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATES SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share..................... $ $ $
Per Warrant................... $ $ $
Total(3)...................... $ $ $
</TABLE>
(1) Does not include additional compensation payable to the Representative in
the form of a non-accountable expense allowance. In addition, see
"Underwriting" for information concerning indemnification and contribution
arrangements with the Underwriters and other compensation payable to the
Representative.
(2) Before deducting estimated expenses of $494,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative. Expenses of this Offering, other than fees and expenses of
counsel to the Selling Stockholders, will be paid by the Company.
(3) The Company has granted to the Underwriters an option (the "Over-allotment
Option") exercisable within 45 days after the date of this Prospectus to
purchase up to an aggregate of 300,000 additional shares of Common Stock
and/or 300,000 additional Warrants upon the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If such Over-allotment
Option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------------
The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Securities offered hereby will be made against payment at the
offices of National Securities Corporation, Seattle, Washington on or about
, 1997.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is , 1997
<PAGE>
[PHOTOGRAPHS AND CAPTIONS]
[PHOTOGRAPHS OF TRANSFORMER WITH ATQ-100 AND OF HEADSET]
------------------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent certified public
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited interim financial information.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING PURCHASES OF THE SECURITIES TO STABILIZE THEIR MARKET PRICES,
PURCHASES OF THE SECURITIES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
SECURITIES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED HEREIN ALL INFORMATION
SET FORTH IN THIS PROSPECTUS (I) DOES NOT GIVE EFFECT TO THE ISSUANCE OF
2,000,000 SHARES OF COMMON STOCK UPON EXERCISE OF THE WARRANTS; (II) DOES NOT
GIVE EFFECT TO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, OR EXERCISE
OF THE WARRANTS GRANTED TO THE REPRESENTATIVE TO PURCHASE 200,000 SHARES OF
COMMON STOCK AND/OR 200,000 WARRANTS (THE "REPRESENTATIVE'S WARRANTS"), OR
EXERCISE OF ANY OTHER STOCK OPTIONS OR WARRANTS ISSUED BY THE COMPANY; AND (III)
ASSUMES THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK OF THE
COMPANY INTO COMMON STOCK ON A 1 FOR 200 BASIS. THE ACCOMPANYING FINANCIAL
STATEMENTS DO NOT ASSUME THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED
STOCK OF THE COMPANY INTO COMMON STOCK. SEE "RISK FACTORS" FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THIS PROSPECTUS CONTAINS FORWARD-
LOOKING STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
QuietPower Systems, Inc. ("QuietPower" or the "Company") is engaged in the
development, commercialization and marketing of products utilizing two
acoustically based technologies: (i) active noise and vibration control and (ii)
failure diagnostic and condition monitoring. The Company's active noise and
vibration control technology uses equal but opposite noise signals to reduce or
cancel noise emissions. QuietPower has used the active noise and vibration
control technology to develop its initial commercial products, including the
ATQ-100, a transformer quieting system which reduces the sound emanating from
electric power distribution transformers. The Company has also commenced
marketing its communication headset systems ("Headsets"), which reduce noise and
enhance communications in high noise industrial environments. QuietPower is
currently engaged in a joint venture with ABB Secheron S.A., an indirect
wholly-owned subsidiary of ABB Asea Brown Boveri Limited ("ABB"), for the
purpose of developing and marketing the ATQ-100 in the European market. The
Company's failure diagnostic and condition monitoring technology is to be
utilized to detect sound emissions that signal imminent equipment failure.
QuietPower is engaged in a joint venture with Prolec-GE, de S. de R.L. de C.V.
("Prolec-GE"), a joint venture between the General Electric Company ("GE") and
Prolec S.A. de C.V., for the purpose of developing a failure diagnostic and
condition monitoring line of products for use with transformers and other
substation equipment. The primary market for the Company's current and proposed
products is the worldwide electric utility (power generation, transmission and
distribution) and supply industries (collectively, the "Power Industry").
The Company has entered into a world-wide exclusive manufacturing, marketing
and distribution agreement with Noise Cancellation Technologies, Inc. ("NCT").
This agreement covers all of NCT's proprietary active noise and vibration
control technology and products relating to the Power Industry and grants the
Company world-wide exclusive rights within the Power Industry. The ATQ-100 and
the Headsets utilize the active noise and vibration control technology to
electronically reduce noise and vibration. Software-based algorithms, used in
conjunction with certain controlling, sensing and actuating hardware components,
act together as a digital signal processor to analyze noise emissions and
produce equal and opposite noise signals. When the two signals meet, the noise
is reduced or canceled. The Company's proposed failure diagnostic and condition
monitoring systems will also utilize digital signal-based technology.
The Company's joint venture with ABB Secheron S.A. was formed for the
purpose of developing and marketing active noise and vibration control systems
for use on transformers in Europe. Each party is obligated to contribute to the
joint venture such personnel and resources as shall be approved in connection
with each product improvement program. Proposed goals of these programs include
reducing
3
<PAGE>
the cost of the ATQ-100, modifying the ATQ-100 to meet European operating
specifications, and marketing and selling the ATQ-100 to European utility
customers.
QuietPower's joint venture with Prolec-GE was formed for the purpose of
developing failure diagnostic systems for power distribution transformers and
other substation equipment. The proposed failure diagnostic and condition
monitoring systems are intended to utilize digital signal processing based
technology to locate and analyze certain acoustic signals that indicate
equipment failure is imminent. QuietPower is obligated to grant the
Prolec-GE/QuietPower joint venture a world-wide license to use the failure
diagnostic and condition monitoring technology and to contribute to the joint
venture such personnel and resources as are required in connection with each
approved project.
The Company's principal operating strategy is to develop and position
products that take advantage of opportunities arising from the significant and
ongoing changes in the Power Industry. The Power Industry is a multibillion
dollar capital-intensive industry. The Company anticipates that the current move
toward deregulation in the North American and European electric utility
industries will increase market demand for companies which offer products that
reduce utilities' operating costs, enhance equipment efficiency and flexibility
and extend the expected useful lives of fixed assets. In addition to the Power
Industry, QuietPower plans to market its products to other capital-intensive
markets. To date, the Company has commenced marketing its Headsets to the
railroad and communication industries. The Company also intends to employ a
growth strategy pursuant to which it will identify and develop additional
products related to its core technologies and products. In this respect, it has
recently commenced development efforts on its active magnetic field control and
cancellation technology, which functions similarly to the active noise and
vibration control technology. The Company also intends to acquire outside
synergistic or alternative technologies and products. The Company has not yet
entered into discussions nor does it have any understandings with respect to any
companies or technologies which it may wish to acquire. The Company currently
intends to seek acquisition opportunities shortly after the completion of this
Offering and intends to use a portion of the net proceeds of this Offering in
furtherance of this acquisition strategy.
QuietPower anticipates utilizing a portion of the net proceeds from this
Offering to finance its participation in the joint ventures and for the
marketing, product development and acquisition activities described above. See
"Use of Proceeds."
The Company was incorporated in Delaware in May 1992 under the name Active
Acoustical Solutions, Inc., and in February 1994 changed its name to QuietPower
Systems, Inc. The Company's principal offices are located at 460 W. 34th Street,
New York, New York 10001. Its telephone number is (212) 967-8480.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered:.......... 2,000,000 Shares of Common Stock and 2,000,000 Warrants. The
Shares and the Warrants will be separately transferable
immediately after the completion of this Offering. See
"Description of Securities."
Terms of Warrants:........... Each Warrant entitles the registered holder thereof to
purchase, at any time commencing one year after the date of
this Prospectus until five years after the date of this
Prospectus, one share of Common Stock at a price of
$ per share [150% of the initial public offering
price per share of Common Stock]. The Warrant exercise price
is subject to adjustment under certain circumstances.
Commencing 18 months after the date of this Prospectus, with
the consent of the Representative, the Warrants are subject
to redemption by the Company, in whole but not in part, at
$0.05 per Warrant, on 30 days' prior written notice,
provided that the average closing sale price of the Common
Stock equals or exceeds $ per share [175% of the
exercise price per share of the Warrant], subject to
adjustment, for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. See
"Description of Securities."
Common Stock Outstanding
Prior to the
Offering(1):............... 1,084,013 shares
Common Stock Outstanding
After the Offering(1):..... 3,084,013 shares
Use of Proceeds:............. The Company intends to use the net proceeds of the Offering
as follows: (i) development of products, (ii) marketing and
sales, (iii) repayment of outstanding indebtedness and
payables, (iv) acquisitions and (v) working capital and
general corporate purposes.
Risk Factors:................ Investment in the Securities offered hereby is highly
speculative and involves a high degree of risk and immediate
and substantial dilution to the purchasers in this Offering.
See "Risk Factors" and "Dilution."
Proposed American Stock
Exchange Symbols:
Common Stock............. KWT
Warrants................. KWT.WS
</TABLE>
- ------------------------
(1) Does not include (i) 1,414,915 shares of Common Stock issuable upon exercise
of outstanding warrants (which number includes warrants to purchase 265,000
shares of Common Stock that will be issued upon completion of this Offering
and warrants to purchase 133,750 shares of Common Stock that are issuable
upon exercise of nominally priced warrants), with a weighted average
exercise price of $3.44 per share, (ii) 250,000 shares of Common Stock
subject to options available under the Company's 1993 Stock Option Plan (the
"1993 Plan"), of which options to purchase an aggregate of 239,490 shares of
Common Stock with a weighted average exercise price of $4.22 per share have
been granted, and options to purchase 10,510 shares of Common Stock remain
available for future grants, and (iii) 83,333 shares of Common Stock
issuable upon conversion of convertible promissory notes in the aggregate
principal amount of $625,000 (assuming an initial public offering price of
$7.50 per Share). See "Management's Discussion and Analysis of Financial
Condition and Results of its Operations," "Use of Proceeds" and
"Management-- Stock Option Plan."
5
<PAGE>
SUMMARY FINANCIAL DATA
The balance sheet data as of December 31, 1996 and the income statement data
presented below for each of the years in the two years ended December 31, 1996
are derived from the Financial Statements of the Company, which have been
audited by Richard A. Eisner and Company, LLP, and are included elsewhere in
this Prospectus. The selected financial data for the year ended December 31,
1994, the three month periods ended March 31, 1996 and 1997 and the balance
sheet data as of March 31, 1997, were derived from unaudited financial
statements of the Company. These financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the financial position and the results of operations
for this period. The information presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTH ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------------- ------------ ------------- ------------- -------------
STATEMENTS OF OPERATIONS:
Net revenues
Product sales........................ $ 0 $ 35,000 $ 216,000 $ 80,000 $ 51,000
Development funding(1)............... 541,000 315,000 0 0 0
------------- ------------ ------------- ------------- -------------
Total revenues................... 541,000 350,000 216,000 80,000 51,000
------------- ------------ ------------- ------------- -------------
Costs and expenses
Cost of sales........................ 0 29,000 260,000 66,000 76,000
Development costs.................... 587,000 335,000 187,000 30,000 92,000
Selling, general and
administrative..................... 893,000 843,000 1,714,000 276,000 418,000
------------- ------------ ------------- ------------- -------------
Total costs and expenses......... 1,480,000 1,207,000 2,161,000 372,000 586,000
------------- ------------ ------------- ------------- -------------
Interest expense....................... 0 17,000 333,000 35,000 89,000
------------- ------------ ------------- ------------- -------------
Net (loss)............................. (939,000) (874,000) (2,278,000) (327,000) (624,000)
Dividend on preferred stock............ (238,000)
------------- ------------ ------------- ------------- -------------
Net (loss) after preferred dividend.... $ (939,000) $ (874,000) $ (2,516,000) $ (327,000) $ (624,000)
------------- ------------ ------------- ------------- -------------
------------- ------------ ------------- ------------- -------------
Net (loss) per share(2)................ $ (.69) $ (.62) $ (1.53) $ (.23) $ (.39)
------------- ------------ ------------- ------------- -------------
------------- ------------ ------------- ------------- -------------
Pro forma weighted average number of
common shares outstanding(2)......... 1,353,000 1,403,000 1,484,000 1,431,000 1,591,000
------------- ------------ ------------- ------------- -------------
------------- ------------ ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------
PRO FORMA
DECEMBER 31, AS
1996 ACTUAL PRO FORMA(3) ADJUSTED(3)(4)
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)...................... $ (654,000) $ (1,916,000) $ (107,000) $ 10,612,000
Total assets(5)................................... 463,000 645,000 2,648,000 12,119,000
Notes payable..................................... 511,000 883,000 2,034,000 588,000
Total liabilities................................. 1,543,000 2,227,000 3,202,000 1,366,000
Accumulated deficit............................... (4,917,000) (5,541,000) (6,324,000) (7,747,000)
Stockholders' equity (deficiency)................. (1,080,000) (1,582,000) (554,000) 10,753,000
</TABLE>
- ------------------------
(1) Development funding consists of the direct investment by utilities in the
Company's research and development projects.
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<PAGE>
(2) See Note B of the Notes to the Financial Statements.
(3) Adjusted to give pro forma effect to (i) a bridge financing, the gross
proceeds of which were $2,000,000 and pursuant to which the Company issued
$2,000,000 of promissory notes and warrants to purchase an aggregate 240,000
shares of Common Stock, which resulted in an original issue discount to the
notes of $856,000, (ii) a private financing pursuant to which the Company
issued $290,000 of one-year promissory notes, which notes are convertible
into Common Stock at a price per share equal to the initial public offering
price per Share, and warrants to purchase an aggregate of 7,733 shares of
Common Stock, which resulted in an original issue discount to the notes of
$18,000, (iii) the conversion of $200,000 of promissory notes existing at
March 31, 1997 plus accrued interest into 39,466 shares of Common Stock,
(iv) the payment of $136,000 to NCT for amounts owing, (v) the payment of
$151,000 with respect to promissory notes outstanding on March 31, 1997,
(vi) the recognition of the expense of $170,000 resulting from the increase
in 26,750 shares of Common Stock and warrants to purchase 26,750 shares of
Common Stock underlying warrants granted in a private financing, and (vii)
the issuance of 80,000 shares of Common Stock to Baltimore Gas and Electric
Company pursuant to a Conversion and Subscription Agreement dated June 13,
1997 and the recognition of a $540,000 expense in connection therewith, all
of which events occurred subsequent to March 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) As adjusted to give effect to (i) the sale of the Securities offered hereby
(at an assumed initial public offering price of $7.50 per Share and $.10 per
Warrant), the initial application of the estimated net proceeds therefrom,
and (ii) the expense of $1,361,000 relating to the write-off of debt
discount and debt issuance cost. Does not give effect to the potential
repayment of $625,000 in convertible promissory notes that become payable on
demand upon completion of the Offering. See "Use of Proceeds."
(5) Includes technology rights. As of March 31, 1997 the balance of such rights
was $313,000.
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RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER
THE FOLLOWING RISKS AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS.
LIMITED OPERATING HISTORY; OPERATING LOSSES; STOCKHOLDERS' AND WORKING CAPITAL
DEFICITS
Since its inception in 1992, the Company has been principally engaged in the
development of its technologies. To date, the majority of the Company's
operations have been financed by the net proceeds of several private placements
of both debt and equity securities of the Company, aggregating approximately
$5,715,000, and funding by utility companies for the research and development of
its technologies, aggregating $541,000 in 1994 and $315,000 in 1995. The Company
has not yet generated any significant product sales revenues and there can be no
assurance that significant revenues will develop. The Company has a limited
operating history on which an evaluation of its performance and prospects can be
made and its operations are subject to all of the risks inherent in the
establishment of a new business enterprise. The likelihood of the success of the
Company must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with a new
business, the identification, development and commercialization of new products,
the dependence on and attempts to apply new and rapidly changing technology, and
the competitive environment in which the Company operates.
The Company sustained net losses of $939,000, $874,000 and $2,278,000 for
the years ended December 31, 1994, 1995 and 1996, respectively. In addition, for
the three months ended March 31, 1997, the Company sustained a net loss of
$624,000. As of March 31, 1997, the Company had a stockholders' (deficit) of
$(1,582,000), a working capital (deficit) of $(1,916,000) and an accumulated
(deficit) of $(5,541,000). In addition, at March 31, 1997, notes payable were
discounted by $187,000, which amount will be expensed as interest in the
remainder of 1997. Furthermore, the Company will expense through the 1997 fiscal
quarter in which the Offering is completed, a non-cash charge of approximately
$1,309,000 of original issue discount and debt issuance costs arising from
private financings completed after March 31, 1997. The Company will also
recognize an expense of $540,000 in the quarter ended June 30, 1997, to give
effect to the Company's issuance of 80,000 shares of Common Stock to Baltimore
Gas and Electric Company ("BG&E"). BG&E has agreed with the Company to convert
all of BG&E's right to receive royalties from the sale of the Company's
transformer quieting systems and purchase discounts on the transformer quieting
system into such shares. The Company expects to continue to incur a loss for at
least the remainder of 1997, and there can be no assurance that the Company will
achieve profitable operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note A of the Notes to the
Financial Statements.
DEPENDENCE ON OFFERING; POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company is dependent upon the net proceeds of this Offering to finance
its operating activities. Although the Company believes that the estimated net
proceeds from this Offering together with cash from operations will enable it to
fund its operations, including product development, marketing and other
operating activities, for at least 12 months, no assurance can be given in that
regard. The Company's future capital requirements could vary significantly and
will depend on certain factors, many of which are not within the Company's
control. Factors that may require the Company to seek additional funding include
the need for cash to fund acquisitions in an aggregate amount in excess of that
allocated from this Offering, greater than anticipated expenses, less than
anticipated revenues, and longer product development times than now
contemplated. See "Business--Business Strategy--Acquisitions." The Company may
seek such additional funding through public or private financings or borrowings.
There can be no assurance that additional funds will be available on acceptable
terms, if at all. If additional funds are raised by issuing equity securities,
substantial dilution to existing stockholders, including purchasers of the
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Securities offered hereby, may result. If additional funds are raised through
the incurrence of debt with financial institutions, the Company would likely
become subject to restrictive covenants relating to its operations and finances.
If adequate funds are not available, the Company may be required to
significantly curtail or cease its expansion strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON NCT
The Company anticipates that it will derive a significant portion of its
revenues for the foreseeable future from the marketing and distribution of
active noise and vibration control products using the proprietary technology of
NCT. The Company does not exercise any control over NCT.
The Company has entered into a Master Agreement, dated March 27, 1995 and
amended on March 28, 1995, April 21, 1995, May 21, 1996 and April 9, 1997 (the
"NCT Master Agreement"), with NCT, the holder of the basic active noise and
vibration control patents upon which the Company relies, which grants the
Company an exclusive world-wide license to manufacture, market, sell and
distribute, for use within the Power Industry, as well as the gas power
industry, active transformer quieting products, and all future products for
which the Company provides development and commercialization funding. The NCT
Master Agreement also grants the Company an exclusive world-wide license in
connection with active steam and gas turbine quieting products, which products
the Company has no current plans to develop in the near term. There can be no
assurance that the Company will be able to raise adequate funds to complete
development of all such projects. In addition, the Company has entered into a
Distributor Agreement with NCT, dated October 7, 1994 (the "Distributor
Agreement"), relating to the industrial communication Headsets.
NCT has incurred substantial net losses from operations since its inception.
Based upon NCT's Annual Report on Form 10-K for the year ended December 31,
1996, at December 31, 1996, NCT had a working capital deficit of $1,312,000, an
accumulated deficit of $83,700,000 and stockholders' equity of $2,610,000. In
addition, based upon such disclosure document, NCT had a net loss of $10,825,000
for 1996. Based upon a press release issued by NCT on April 16, 1997, NCT
reported net income of $600,000 for the three months ended March 31, 1997,
although there can be no assurance that NCT will continue to generate profits
from its operations. Due to the Company's important contractual ties with NCT,
the Company may be significantly and adversely affected should NCT be unable to
continue operations or otherwise perform its obligations with the Company. In
the event that NCT commences, or is subject to, a bankruptcy or reorganization
case, or ceases to operate its business, then, notwithstanding certain statutory
and contractual protective provisions regarding the continued effectiveness of
the Company's licenses from NCT, NCT may be able to reject, breach or be excused
from performing, or may fail to perform, its obligations under the NCT Master
Agreement, the Distributor Agreement and any other agreement between NCT and the
Company. See "Business--Contractual Agreements with NCT."
LIMITED SALES HISTORY; NEED FOR COST REDUCTION OF ATQ-100 AND MODIFICATION OF
HEADSETS; SUBSTANTIAL TIME LAPSE UNTIL ADDITIONAL COMMERCIAL PRODUCT
INTRODUCTION
Pursuant to the NCT Master Agreement, the Company has developed and
commenced marketing the first of its active noise and vibration control
products, a transformer quieting system called the ATQ-100. In 1996, sales for
the ATQ-100 totalled $178,000. Based upon market feedback, the Company has
recently determined to accelerate its efforts to lower the sales price of the
ATQ-100 by continuing a significant development effort to reduce the cost of the
system components and installation of the ATQ-100. As a result, the Company
believes that the gross profit relating to sales of this product in the first
half of 1997 will be nominal. There can be, however, no assurance that the
Company will achieve commercially significant sales or that the Company will
reduce costs sufficiently to generate acceptable gross profit margins.
9
<PAGE>
The Company has also commenced marketing its industrial communication
headsets ("Headsets"), for which sales in 1996 totalled $38,000. In view of
market response to initial marketing efforts regarding the communication
Headsets, the Company determined that in order to achieve significant Headset
sales, engineering modifications were necessary to tailor the Headsets to the
needs of each specific industry (e.g. the Power Industry, railroads, oil and
gas, mining and pulp and paper). Although design modifications have recently
been completed for railroad industry Headsets and are substantially completed
for Power Industry Headsets, there can be no assurance that these and any future
design modifications will result in significantly increased Headset sales.
The Company does not anticipate that the commercial development of its next
products will be completed until at least the third quarter of 1997. There can
be no assurance as to the time required to complete such development efforts, or
that they can be successfully completed at all.
COMPETITION; TECHNOLOGICAL OBSOLESCENCE
The Company does not believe that any other company is now developing and/or
commercializing products for the Power Industry utilizing the active noise and
vibration control or failure diagnostic and condition monitoring technologies.
However, the Company faces competition from companies developing their own noise
reduction and failure diagnostic systems and from companies which develop
traditional methods of quieting, such as barrier walls or reinforced "low noise"
transformers. With respect to the ATQ-100 and the Headsets, the Company believes
that it will compete primarily on the basis of cost and effectiveness. In
addition, competition may arise from products currently in development, or
developed in the future, by other companies. The development by others of new
and improved products, processes, and technologies may make the products
marketed by the Company less competitive or obsolete. Many of the Company's
current and potential competitors are likely to have substantially greater
financial, managerial and technical resources than the Company. There can be no
assurance that the Company will be able to compete successfully in its markets.
See "Business--Competition."
UNCERTAIN MARKET ACCEPTANCE
Since its inception, the Company has primarily focused its efforts on active
noise and vibration control and failure diagnostic and condition monitoring
products for the Power Industry, and Headsets for multiple industries. As with
any new technology, there is the risk that the market may not recognize the
benefits or the potential applications of the active noise and vibration control
and failure diagnostic condition monitoring technologies, or any future products
or technologies developed by the Company. Market acceptance of the Company's
products will depend, in large part, upon the ability of the Company to
demonstrate to prospective customers the potential advantages of the Company's
products over other types of products performing similar functions. There can be
no assurance that the Company will be successful in marketing its products to
the Power Industry or other markets or that the Company's products will be
accepted by the Power Industry or other markets. See "Business--Business
Strategy" and "Business--Additional Potential Active Noise Control Products."
RISK OF INTERNATIONAL OPERATIONS
The Company intends to market its products in industrialized international
markets. International operations entail various risks, including economic
instability and recessions, exposure to currency fluctuations, difficulties of
administering foreign operations generally, and obligations to comply with a
wide variety of foreign import and United States export laws, tariffs and other
regulatory requirements. The Company's competitiveness in overseas markets may
be negatively impacted if there is a significant increase in the value of the
dollar against the currencies of the other countries in which the Company does
business. In addition, the laws of certain foreign countries may not protect the
Company's proprietary rights to the same extent as the laws of the United
States.
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<PAGE>
DEPENDENCE ON PATENTS; UNCERTAIN PROPRIETARY PROTECTION
The Company's success with respect to its active noise and vibration
control, failure diagnostic and condition monitoring and active magnetic field
cancellation systems is dependent in large measure upon its ability to obtain
patent protection for these products. NCT holds or has rights to all of the
active noise and vibration control patents on which the Company relies. To date
the Company has filed patent applications in the United States and pursuant to
the Patent Cooperation Treaty in Canada and other countries in connection with
its failure diagnostic and condition monitoring system, and is currently
preparing a patent application for filing with regard to its active magnetic
field cancellation system. There can be no assurance that patents will issue
from any of the Company's patent applications, or that the Company will develop
additional products that are patentable. No assurance can be given as to the
range or degree of protection any patents issued to the Company or licensed from
NCT will afford or that such patents or licenses will provide protection that
has commercial significance or will provide competitive advantages for the
Company's products. No assurance can be given that either the Company's owned or
licensed patents will afford protection against competitors with similar
technologies or that others will not obtain patents claiming aspects similar to
those covered by the Company's owned or licensed patents or patent applications.
No assurance exists that the Company's owned or licensed patents will not be
challenged by third parties, invalidated, rendered unenforceable or designed
around. Furthermore, there can be no assurance that any pending patent
application of QuietPower or applications filed in the future by the Company
will result in the issuance of a patent. The invalidation or expiration of
patents owned or licensed by the Company and believed by the Company to be
commercially significant could permit increased competition, with potential
adverse effects on the Company and its business prospects. Although NCT has
indicated to the Company that it intends to file for extensions to certain
patents, the Company can make no assurances that, if filed, the United States or
foreign government patent authorities will grant such extensions to NCT. In
addition, there can be no assurance that any patents which are issued to or
licensed by the Company will be held valid by a court of law reviewing any such
patent.
With respect to the patents owned by, or licensed to NCT, NCT has indicated
to the Company that it has conducted only limited patent searches and no
assurances can be given by the Company that patents do not exist or will not be
issued in the future that would have an adverse effect on the Company's ability
to market its products or maintain its competitive position with respect to its
products. In the event NCT chooses not to defend against its patent rights,
substantial resources may be required to obtain and defend patent and other
rights to protect present and future technology and other property of the
Company. Although the Company intends to pursue its interests in preventing
infringement of any patents licensed to it which are not pursued by NCT, the
Company makes no assurances that it will be successful in any action for
infringement of the technology licensed to it. See "Business--Patent
Protection."
DEPENDENCE ON JOINT VENTURE PARTNERS
The Company's strategy for the testing, development, manufacturing and
commercialization of the majority of its products requires arrangements with
partners in, or manufacturers for, the Power Industry, and is dependent upon the
subsequent success of these outside parties in performing their
responsibilities. In this regard, the Company has entered into joint venture
agreements with ABB Secheron S.A. with respect to the marketing of the ATQ-100
system in Europe and with Prolec-GE with respect to the marketing and
development of failure diagnostic and condition monitoring systems worldwide. In
addition, there can be no assurance that such partners will not pursue
alternative technologies. In the event an appropriate joint venture arrangement
is not available relating to the manufacturing of any one or more products, the
Company will be required to enter into contract manufacturing arrangements.
There can be no assurance that the Company will be able to negotiate acceptable
joint venture or contract manufacture arrangements, or that any such
arrangements will be successful. See "Business--Joint Venture Agreements."
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<PAGE>
NO MANUFACTURING FACILITIES OR PERSONNEL
The Company does not have any capability to manufacture any products it
develops and its management has no experience in large-scale manufacturing.
Accordingly, if in the future the Company is unable to have third parties
manufacture its products, either pursuant to joint venture or contract
manufacturing agreements, or if the Company decides to manufacture its developed
products, the Company will be required to establish the necessary manufacturing
facilities and employ and train qualified manufacturing personnel, all of which
may result in a delay in the production of the Company's products. The Company
will also require substantial additional financing to establish a large scale
manufacturing facility. There can be no assurance that the Company will be
successful in attracting and retaining experienced personnel or establishing the
necessary manufacturing facilities or arrangements that will enable the Company
to operate or produce high quality products for sale at competitive prices. The
failure to achieve these objectives could have a material adverse affect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing."
LIMITED MARKETING AND SALES CAPABILITIES
The Company has limited marketing and sales capabilities. In order to market
and sell the Company's products directly or through strategic joint venture
arrangements, the Company will need to develop a larger sales force and
marketing group with technical expertise, or make appropriate arrangements with
joint venture partners. There can be no assurance that such efforts will be
successful. In addition, there can be no assurance that the Company will be able
to effectively market or sell its products through sales representatives,
through arrangements with some other outside sales force, or through strategic
partners. See "Business--Business Strategy--Marketing."
NO ASSURANCE OF SUCCESS OF ACQUISITION PROGRAM
The Company intends, subject to having appropriate financing, to make
acquisitions of or from entities that offer other leading edge technologies to
utilities. There can be no assurance that any such acquisitions will be made or
that, if made, such acquisitions will prove profitable to the Company. See "Use
of Proceeds" and "Business--Business Strategy--Acquisitions."
DEPENDENCE ON KEY PERSONNEL
The Company is heavily dependent upon the active participation of its
President, Jonathan M. Charry, Ph.D. In this respect, Dr. Charry has
longstanding relationships with representatives within the Power Industry which
comprises the major market for the Company's products. Dr. Charry has entered
into an employment agreement with the Company for a term expiring in March 1998,
and the Company has obtained a key person life insurance policy in the amount of
$1 million on the life of Dr. Charry. The loss of the services of Dr. Charry
could have a material adverse effect on the Company. In addition, the Company is
dependent on the services of its sales and marketing and research and
development personnel, consisting of a limited number of persons with highly
specialized technical knowledge. The loss of any of such persons could mean a
delay in the development and/or marketing of one or more of its proposed or
actual products.
The Company's present management has limited experience in managing a large
business. In order to meet its business objectives, it will be necessary for the
Company to hire appropriate management personnel, as well as additional
scientific and engineering personnel. The Company competes for such persons with
other companies, academic institutions, government entities and other
organizations, some of which may have substantially greater capital resources
and facilities than the Company. There can be no assurance that the Company will
be successful in recruiting and retaining such personnel. See "Business--
Employees" and "Management."
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CONTROL BY EXISTING STOCKHOLDERS
Existing stockholders of the Company presently own 1,084,013 shares of
Common Stock and options and warrants to purchase an aggregate of 1,654,405
(including warrants issuable upon completion of this Offering) shares of Common
Stock. Upon consummation of this Offering, assuming all warrants and options of
existing stockholders are exercised (but not the Warrants or the
Representative's Warrants), such stockholders will beneficially own 57.8% of the
Common Stock. Immediately after the Offering, the existing stockholders will
have the ability to elect a majority of the Company's directors and otherwise
control the Company. See "Principal Stockholders."
GUARANTEED RATE OF RETURN TO PREFERRED STOCKHOLDERS
The holders of the Series A Convertible Preferred Stock, purchased in
December 1996, were guaranteed a 35% annual rate of return on their investment,
through the completion of the Company's initial public offering. In this
connection, to the extent such holders do not realize a 35% rate of return on
their investment upon completion of this Offering, they shall receive additional
shares of Common Stock. Based upon the currently proposed price of the Common
Stock offered hereby, no additional shares will be required to be issued to the
holders of the Series A Convertible Preferred Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SPECULATIVE NATURE OF THE WARRANTS
The Warrants do not confer any rights of Common Stock ownership on their
holders, such as voting rights or the right to receive dividends, but rather
merely represent the right to acquire shares of Common Stock at a fixed price
for a limited period of time. Specifically, commencing one year after the date
of this Prospectus, holders of the Warrants may exercise their right to acquire
Common Stock and pay an exercise price of $ per share [150% of the
initial public offering price per Share], subject to adjustment upon the
occurrence of certain dilutive events, until five years after the date of this
Prospectus, after which date any unexercised Warrants will expire and have no
further value. Moreover, following the completion of the Offering, the market
value of the Warrants is uncertain and there can be no assurance that the market
value of the Warrants will equal or exceed their initial public offering price.
There can be no assurance that the market price of the Common Stock will ever
equal or exceed the exercise price of the Warrants, and consequently, whether it
will ever be profitable for holders of the Warrants to exercise their Warrants.
See "Description of Securities--Warrants."
IMMEDIATE SUBSTANTIAL DILUTION
Purchasers of Securities in this Offering will experience immediate and
substantial dilution in the net tangible book value of the shares of Common
Stock purchased by them in this Offering. The immediate dilution to purchasers
of the Securities offered hereby (assuming a public offering price of $7.50 per
Share) will be $4.13, or 55.1%, per share of Common Stock. Additional dilution
to future net tangible book value per share may occur upon the exercise of the
Warrants, Representative's Warrants, and other options and warrants that are
outstanding or will be issued by the Company. The current stockholders of the
Company, including the Company's officers and directors, acquired their shares
of Common Stock, in most cases, for nominal consideration or for consideration
substantially less than the public offering price of the shares of Common Stock
included in this Offering. See "Capitalization," "Dilution" and "Certain
Transactions."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
The Warrant Agreement provides that, commencing eighteen months after the
date of this Prospectus, with the consent of the Representative, if the average
closing sale price of the Common Stock equals or exceeds $ per share
[175% of the then exercise price per Warrant] for any twenty trading days
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<PAGE>
within a period of thirty consecutive trading days ending on the fifth trading
day prior to the Company's notice of its intent to redeem the Warrants, the
Company may redeem all, but not less than all, of the Warrants for $0.05 per
Warrant. If the Warrants are redeemed, holders of the Warrants will lose their
rights to exercise the Warrants after the expiration of the 30-day notice of
redemption period. Upon receipt of a notice of redemption, holders would be
required to: (i) exercise the Warrants and pay the exercise price at a time when
it may be disadvantageous for them to do so, (ii) sell the Warrants at the
current market price, if any, when they might prefer to hold the Warrants, or
(iii) accept the redemption price which is likely to be substantially less than
the market value of the Warrants at the time of redemption. See "Description of
Securities--Warrants."
POTENTIAL ADVERSE EFFECT OF REPRESENTATIVE'S WARRANTS
In connection with this Offering, the Company has authorized the issuance of
the Representative's Warrants and has reserved 400,000 shares of Common Stock
for issuance upon exercise of such warrants (including the Warrants issuable
upon exercise of the Representative's Warrants). The Representative's Warrants
will entitle the holders thereof to acquire shares of Common Stock and Warrants
at an exercise price of 120% of the initial public offering price per share and
Warrant, respectively ($9.00 per share assuming an initial public offering price
of $7.50 per Share). The Representative's Warrants will be exercisable at any
time from the first anniversary of the date of this Prospectus until the fifth
anniversary of the date of this Prospectus. For the term of the Representative's
Warrants, the holders thereof will have, at nominal cost, the opportunity to
profit from a rise in the market price of the Securities without assuming the
risk of ownership, with a resulting dilution in the interest of the other
security holders. As long as the Representative's Warrants remain unexercised,
the Company's ability to obtain additional capital might be adversely affected.
Moreover, the holders of the Representative's Warrants may be expected to
exercise such warrants at a time when the Company would, in all likelihood, be
able to obtain any needed capital by a new offering of its securities on terms
more favorable than those provided by such warrants. See "Underwriting."
NO DIVIDENDS
The Company has never declared or paid dividends, and does not intend to pay
any dividends in the foreseeable future on shares of Common Stock. Earnings of
the Company, if any, are expected to be retained for use in expanding the
Company's business. The payment of dividends is within the discretion of the
Board of Directors of the Company and will depend upon the Company's earnings,
if any, capital requirements, financial condition and such other factors as are
considered to be relevant by the Board of Directors from time to time. See
"Dividend Policy."
NO PUBLIC MARKET FOR THE SECURITIES
Prior to this Offering there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that an active public market for
the Securities will develop or be sustained after this Offering. See
"Underwriting."
LEGAL RESTRICTIONS ON SALES OF SHARES UNDERLYING THE WARRANTS
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. The Warrants may be deprived of value if
a current prospectus covering the shares of Common Stock issuable upon the
exercise of the Warrants is not kept effective. The Common Stock and the
Warrants are separately transferable immediately upon issuance. Purchasers may
buy Warrants in the aftermarket or may move to jurisdictions in which the shares
underlying the Warrants are not so registered or qualified during the period
that the Warrants are exercisable. In this event, the
14
<PAGE>
Company would be unable to issue shares to those persons desiring to exercise
their Warrants, and holders of Warrants would have no choice but to attempt to
sell the Warrants in a jurisdiction where such sale is permissible or allow them
to expire unexercised. See "Description of Securities--Warrants."
CERTAIN ANTI-TAKEOVER PROVISIONS AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE OF
SECURITIES FROM ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation and By-laws contain certain
provisions that could have the effect of delaying or preventing a change of
control of the Company, which could limit the ability of security holders to
dispose of their Common Stock and/or Warrants in such transactions. The
Certificate of Incorporation authorizes the Board of Directors to issue one or
more series of preferred stock without stockholder approval. Such preferred
stock could have voting and conversion rights that adversely affect the voting
power of the holders of Common Stock, or could result in one or more classes of
outstanding securities that would have dividend, liquidation or other rights
superior to those of the Common Stock. Issuance of such preferred stock may have
an adverse effect on the then prevailing market price of the Common Stock and
Warrants. Additionally, the Company is subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law, which prohibits the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. Section 203 could have the
effect of delaying or preventing a change of control of the Company. See
"Description of Securities--Preferred Stock" and "Description of
Securities--Anti-Takeover Provisions."
BROAD DISCRETION OVER APPLICATION OF PROCEEDS
A substantial portion of the net proceeds of this Offering, aggregating
approximately $4,147,000 or 33%, has been allocated for working capital and
general corporate purposes, including the funding of acquisitions. Accordingly,
management of the Company will have broad discretion in determining the manner
in which the net proceeds of the Offering are applied. See "Use of Proceeds."
ARBITRARY DETERMINATION OF OFFERING PRICE
The initial public offering prices of the Securities, as well as the
exercise prices of the Warrants and the Representative's Warrants, were
determined by negotiations between the Company and the Representative, and
should not be regarded as indicative of any future market price of the
Securities. The factors considered in such negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure, the market for
initial public offerings and certain other factors as were deemed relevant.
However, the public offering price of the Securities and the exercise prices of
the Warrants and the Representative's Warrants do not necessarily bear any
relationship to the Company's assets, book value, earnings or any other
established criteria of value. See "Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market has, from time to time, experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Securities, like the
stock prices of many publicly-traded companies, may prove to be highly volatile.
Announcements of innovations or new commercial products by the Company or its
competitors, developments or disputes concerning proprietary rights, as well as
period-to-period fluctuations in financial results, among other factors, may
have a significant impact on the market price of the Securities.
15
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 3,084,013
shares of Common Stock outstanding (assuming no exercise of warrants or
options). All of the 2,000,000 shares of Common Stock being offered hereby will
be immediately tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). Subject to certain
contractual restrictions as described below and the continued effectiveness of
the Selling Stockholders' prospectus within this registration statement relating
to these shares, an additional 507,500 shares of Common Stock issuable upon
exercise of the Private Placement Warrants will be freely tradeable. See
"Concurrent Offering." The Selling Stockholders have agreed not to sell any of
such securities for a period of three months from the date of this Prospectus
and not to sell 137,500 of such securities for a period of nine months from the
date of this Prospectus without the prior written consent of the Representative.
The 1,084,013 shares of Common Stock issued and outstanding prior to this
Offering are deemed to be "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act, and may be sold without
registration pursuant to such rule at varying times, commencing 90 days from the
date hereof. In addition, the Company currently has outstanding options and
warrants (not including the Warrants and Private Placement Warrants) to purchase
an additional 1,654,405 shares of Common Stock (including certain warrants
issuable upon completion of this Offering). All of the officers and directors of
the Company and all holders of 1% or more of the issued and outstanding Common
Stock and all holders of options, warrants or other securities convertible,
exercisable, or exchangeable for 1% or more of the issued and outstanding Common
Stock (except as described above) have agreed not to, directly or indirectly,
issue, offer, agree or offer to sell, sell, transfer, assign, encumber, grant an
option for the purchase or sale of, pledge, hypothecate or otherwise dispose of
any beneficial interest in such securities for a period of 13 months following
the effective date of the Registration Statement without the prior written
consent of the Company and the Representative. An appropriate legend shall be
marked on the face of the certificates representing all such securities. The
Company has granted certain demand and piggyback registration rights to the
Representative with respect to the securities issuable upon exercise of the
Representative's Warrants. In addition, the Company has also granted certain
piggyback registration rights to BWM Investments, an affiliate of Breslow &
Walker, LLP, counsel to the Company, and Kalkines, Arky, Zall & Bernstein of
which William S. Bernstein, a director of the Company, is a partner, in each
case as to 25,000 shares of Common Stock underlying warrants, and to Baltimore
Gas and Electric Company as to 80,000 shares of Common Stock. See "Certain
Transactions" and "Legal Matters."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year (including the holding period of any prior owner except an
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (approximately 30,840 shares immediately
after this Offering), or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. No prediction can be made as to the effect, if any, that
sales of shares of Common Stock or even the availability of such shares for sale
will have on the market prices prevailing from time to time. The possibility
that substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock or the Warrants
and could impair the Company's ability to raise capital through the sale of its
equity securities. See "Principal Stockholders," "Description of Securities,"
"Shares Eligible for Future Sale" and "Underwriting."
POTENTIAL ADVERSE EFFECT OF SUBSTANTIAL SHARES OF COMMON STOCK RESERVED FOR
ISSUANCE
The Company has reserved a total of 4,148,248 shares of Common Stock for
issuance as follows: (i) 2,000,000 shares for issuance upon exercise of the
2,000,000 Warrants; (ii) 200,000 shares for issuance upon exercise of the
Representative's Warrants; (iii) 200,000 shares for issuance upon exercise of
the Warrants issuable upon exercise of the Representative's Warrants; (iv)
1,414,915 shares at a weighted
16
<PAGE>
average exercise price of $3.44 per share subject to outstanding warrants as of
the date of this Prospectus; (v) 83,333 shares issuable upon conversion of
outstanding promissory notes totalling $625,000 (assuming an initial public
offering price of $7.50 per Share); and (vi) 250,000 shares for issuance
pursuant to the 1993 Plan, 239,940 shares of which are issuable at a weighted
average exercise price of $4.22 per share upon exercise of stock options
outstanding as of the date hereof. The existence of the Warrants, the
Representative's Warrants and other options or warrants may adversely affect the
Company's ability to consummate future equity financings. Further, the holders
of such warrants and options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. The exercise and sale of the Common Stock underlying the warrants
and options would have a dilutive effect on the Company's stockholders, as well
as have a material adverse effect on the market price of the Common Stock. See
"Shares Eligible for Future Sale."
REPRESENTATIVE'S INFLUENCE ON THE MARKET
A significant amount of the Securities offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with the
Representative. If it participates in the market, the Representative may exert a
dominating influence on the market, if one develops, for the Securities
described in this Prospectus. Such marketmaking activity may be discontinued at
any time. The price and liquidity of the Common Stock and the Warrants may be
significantly affected by the degree, if any, of the Representative's
participation in such market. See "Description of Securities" and
"Underwriting."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the Delaware General Corporation Law ("Delaware Law"), the personal
liability of directors for monetary damages for breach of their fiduciary duties
as a director. The Company's By-laws provide that the Company shall indemnify
its officers and directors and may indemnify its employees and other agents to
the fullest extent permitted by law. Section 145 of the Delaware Law provides
that a corporation may indemnify a director, officer, employee or agent made or
threatened to be made a party to an action by reason of the fact that he was a
director, officer, employee or agent of the corporation or was serving at the
request of the corporation, against expenses actually and reasonably incurred in
connection with such action if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reasonable cause to believe his conduct was unlawful. Delaware Law does not
permit a corporation to eliminate a director's duty of care, and the provisions
of the Company's Certificate of Incorporation have no effect on the availability
of equitable remedies, such as injunction or rescission, for a director's breach
of the duty of care. See "Management--Indemnification of Directors."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This Prospectus contains certain forward-looking statements regarding, among
other items, the Company's expansion strategy. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Prospectus will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
17
<PAGE>
CONCURRENT OFFERING
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering of 507,500 shares of Common
Stock issuable upon exercise of the Private Placement Warrants held by DayStar
Partners, L.P., Douglas Lee, The Smith 1987 Family Trust, J. Thomas Bentley,
Westminster Associates, Ltd., QPS Bridge, LLC, Anderson, Weinroth & Co., L.P.
and Regent Capital Partners, L.P. (collectively, the "Selling Stockholders"),
all of which may be sold in the open market, in privately negotiated
transactions or otherwise, directly by the Selling Stockholders. The Selling
Stockholders have agreed with the Representative not to sell any of such
securities for three months from the date of this Prospectus and not to sell
137,500 of such securities prior to nine months from the date of this Prospectus
without the consent of the Representative. The Company will not receive any
proceeds from the sale of such securities by the Selling Stockholders, although
it will receive proceeds from the exercise of the Private Placement Warrants, if
any. Expenses of the concurrent offering, other than fees and expenses of
counsel to the Selling Stockholders and selling commissions, will be paid by the
Company. Sales of such securities by the holders thereof or the potential for
such sales may have an adverse effect on the market price of the Securities
offered hereby.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby (assuming an initial public offering price of $7.50 per Share and $.10
per Warrant), after deduction of underwriting discounts and other estimated
offering expenses, are estimated to be approximately $12,730,000 ($14,782,000 if
the Underwriters' Over-allotment Option is exercised in full). The Company
intends to utilize such net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT OF NET PERCENTAGE OF NET
PROCEEDS(1) PROCEEDS
------------- -------------------
<S> <C> <C>
Development Costs (2)....................................... $ 4,400,000 34%
Marketing and Sales (3)..................................... $ 1,400,000 11%
Repayment of Indebtedness and Payables (4).................. $ 2,783,000 22%
Working Capital and General Corporate Purposes (5).......... $ 4,147,000 33%
------------- ---
Total................................................... $12,730,000 100%
------------- ---
------------- ---
</TABLE>
- ------------------------
(1) The amount set forth with respect to each purpose represents the Company's
current estimate of the approximate amount of the net proceeds that will be
used for such purpose. However, the Company reserves the right to change the
amount of such net proceeds that will be used for any purpose to the extent
that management determines that such change is advisable. Consequently,
management of the Company will have broad discretion in determining the
manner in which the net proceeds of the Offering are applied. See "Risk
Factors--Broad Discretion over Application of Proceeds."
(2) Represents anticipated development costs associated with (i) the Company's
efforts to reduce the cost of the system components and installation of the
ATQ-100 system, (ii) the Company's development of an air core reactor
quieting system, (iii) the Company's development efforts relating to the
active magnetic field control and cancellation program, (iv) the Company's
obligated expenditures under the joint venture agreement with Prolec-GE, (v)
the Company's obligated expenditures under the joint venture agreement with
ABB Secheron S.A., and (vi) the Company's efforts to modify the design of
the Headset systems for specific industries. See "Business."
(3) Represents anticipated costs associated with the expansion of the Company's
marketing and sales activities, including market research, advertising and
development of promotional materials related to the Company's current and
proposed products. See "Business--Business Strategy--Marketing."
(4) Represents the payment of (i) certain payables of the Company owed to NCT
under the NCT Master Agreement, aggregating approximately $200,000, (ii) the
Company's notes held by DayStar Partners, L.P. and certain other purchasers,
aggregating approximately $458,000 (including accrued interest through June
30, 1997), which notes bear interest at a rate of 15%, and were issued in a
private placement by the Company, the proceeds of which were used for
working capital purposes, (iii) the Company's notes held by QPS Bridge, LLC
and Regent Capital Partners, L.P., aggregating approximately $2,045,000
(including accrued interest through June 30, 1997), which notes bear
interest at a rate of 11% and were issued in a private placement by the
Company, the proceeds of which were used for general operating purposes
including development and marketing efforts and the repayment of certain
debt obligations, and (iv) an advance received in 1994 from its stockholder,
Environmental Research, Inc. (of which the Chief Executive Officer of the
Company is Chairman, President and a 10% stockholder), aggregating $80,000,
which amount was used for working capital. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
(5) Represents funds that may be utilized (i) for working capital and general
corporate purposes, (ii) to pay the cash portion of one or more acquisitions
that may be effected by the Company, and (iii) to pay
19
<PAGE>
the Company's notes that were issued pursuant to a debt financing completed
in April 1997, the proceeds of which aggregated $625,000 and were used for
working capital purposes, which notes become payable on demand in cash or in
shares of Common Stock upon completion of the Offering. The amount to be
used for acquisitions may vary considerably based on the number of
acquisitions made by the Company as well as the type of transactions used
for such acquisitions, and whether the purchase price is paid in cash or
securities. The Company has not yet entered into discussions with any
potential acquisition candidates, nor are there any understandings with
respect to any entities which it may desire to acquire, and there can be no
assurance that the Company will consummate any such acquisitions. The
Company currently intends to seek acquisition opportunities shortly after
the completion of this Offering. See "Business--Business
Strategy--Acquisitions."
The Company anticipates, based on current plans and assumptions relating to
its operations, that the net proceeds of this Offering, together with net cash
from operations, should be sufficient to satisfy the Company's cash requirements
for at least 12 months after the date of this Prospectus. Proceeds not
immediately required for the purposes described above will be invested in
short-term, investment grade, interest bearing government obligations. However,
there can be no assurance that the net proceeds of the Offering will satisfy the
Company's requirements for any particular period of time. In the event the
Company identifies additional acquisition candidates, or if the Company
identifies new applications for its technology which require additional internal
development efforts, the Company may require additional financing after the use
of the net proceeds of the Offering to pursue such opportunities. No assurance
can be given that such additional financing will be available when needed on
terms acceptable to the Company, if at all. See "Risk Factors--Dependence on
Offering; Possible Need for Additional Financing."
DIVIDEND POLICY
The Company has never declared or paid dividends, and does not intend to pay
any dividends in the foreseeable future on shares of Common Stock. Earnings of
the Company, if any, are expected to be retained for use in expanding the
Company's business. The payment of dividends is within the discretion of the
Board of Directors of the Company and will depend upon the Company's earnings,
if any, capital requirements, financial condition and such other factors as are
considered to be relevant by the Board of Directors from time to time. During
1996, the Company recorded a non-cash dividend of $238,000, reflecting the value
attributable to warrants issuable upon the conversion of the preferred stock and
the treatment thereof as a dividend.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 (i) on an actual basis, (ii) on a pro forma basis to give effect to
certain financial events occurring subsequent to March 31, 1997, and (iii) on a
pro forma basis as adjusted to give effect to the sale by the Company of the
Securities offered hereby (at an assumed initial public offering price of $7.50
per Share and $.10 per Warrant) and the initial application of the estimated net
proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------
<S> <C> <C> <C>
PRO FORMA
AS
ACTUAL PRO FORMA(1) ADJUSTED(1)(2)
------------- ------------- ----------------
Notes payable (net of unamortized discount of $187,000 actual;
$992,000 pro forma; $37,000 as adjusted)....................... $ 883,000 $ 2,034,000 $ 588,000
------------- ------------- ----------------
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000 shares
authorized, issued 1,325 (actual and pro forma), none issued
and outstanding (as adjusted)................................ 1,059,000 1,059,000 --
Common stock, par value $.01 per share; 10,000,000 shares
authorized; issued 699,547 (actual), 819,013 (pro forma),
3,084,013 (pro forma as adjusted)............................ 7,000 8,000 31,000
Additional paid-in capital..................................... 3,169,000 4,979,000 18,745,000
Unearned options/warrants(3)................................... (276,000) (276,000) (276,000)
Accumulated deficit............................................ (5,541,000) (6,324,000) (7,747,000)
------------- ------------- ----------------
Total stockholders' equity (deficit)............................. $ (1,582,000) $ (554,000) $ 10,753,000
------------- ------------- ----------------
------------- ------------- ----------------
Total capitalization............................................. $ (699,000) $ 1,480,000 $ 11,341,000
------------- ------------- ----------------
------------- ------------- ----------------
</TABLE>
- ------------------------
(1) Adjusted to give pro forma effect to (i) a debt financing, the gross
proceeds of which were $2,000,000 and pursuant to which the Company issued
$2,000,000 of promissory notes and warrants to purchase an aggregate 240,000
shares of Common Stock, (ii) a private financing pursuant to which the
Company issued $290,000 of one-year promissory notes, which notes are
convertible into Common Stock at a price per share equal to the initial
public offering price per Share, and warrants to purchase an aggregate of
7,733 shares of Common Stock, (iii) the conversion of $200,000 of promissory
notes existing at March 31, 1997 into 39,466 shares of Common Stock, (iv)
the payment of $151,000 with respect to promissory notes outstanding on
March 31, 1997, (v) the recognition of the expense of $170,000 resulting
from the increase in 26,750 shares of Common Stock and warrants to purchase
26,750 shares of Common Stock underlying warrants granted in a private
financing, and (vi) the issuance of 80,000 shares of Common Stock to
Baltimore Gas and Electric Company pursuant to a Conversion and Subscription
Agreement dated June 13, 1997 and the recognition of a $540,000 expense in
connection therewith, all of which events occurred subsequent to March 31,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) As adjusted to give effect to (i) the sale of the Securities offered hereby
(at an assumed initial public offering price of $7.50 per Share and $.10 per
Warrant), and initial application of the estimated net proceeds therefrom
and (ii) the expense of $1,361,000 relating to the write-off of debt
discount and debt issuance cost. Does not give effect to the potential
repayment of $625,000 in convertible promissory notes that become payable on
demand upon completion of the Offering.
(3) Represents the difference between the exercise price of compensatory stock
options and warrants issued, but unvested, to employees of the Company and
the fair market value of the Common Stock. See Note B[7] of the Notes to the
Financial Statements.
21
<PAGE>
DILUTION
At March 31, 1997, the Company had a negative net tangible book value of
$(2,075,000) or $(2.15) per share of Common Stock. Net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of outstanding
shares of Common Stock. The difference between the offering price per share of
Common Stock and the net tangible book value per share after this Offering
constitutes the dilution to investors in this Offering. After giving effect to
(i) a bridge financing, the gross proceeds of which were $2,000,000 and pursuant
to which the Company issued promissory notes and warrants to purchase an
aggregate of 240,000 shares of Common Stock, (ii) a private financing pursuant
to which the Company issued $290,000 of one-year promissory notes, which are
convertible into Common Stock at a price per share equal to the initial public
offering price per Share, and warrants to purchase 7,733 shares of Common Stock,
(iii) the conversion of $200,000 of promissory notes existing at March 31, 1997
into 39,466 shares of Common Stock, (iv) the payment of $151,000 with respect to
promissory notes outstanding on March 31, 1997, (v) the expense of $1,361,000
relating to the write-off of debt discount and debt issuance cost, (vi) the
issuance of 80,000 shares of Common Stock to Baltimore Gas and Electric Company
pursuant to a Conversion and Subscription Agreement dated June 13, 1997 and the
recognition of a $540,000 expense in connection therewith, and (vii) the sale of
the shares of Common Stock and Warrants offered hereby at an assumed initial
public offering price of $7.50 per share and $.10 per Warrant, and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company, the pro forma net tangible book value of the Company at
March 31, 1997 would have been $10,381,000 or $3.37 per share. This represents
an immediate increase in pro forma net tangible book value of $5.52 per share to
the existing stockholders of the Company and an immediate dilution of $4.13
(55.1%) per share to new investors. The following table illustrates the
foregoing information with respect to dilution to new investors on a per share
basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 7.50
Negative net tangible book value per share prior to the
Offering................................................... (2.15)
Increase per share attributable to the Offering.............. 5.52
Pro forma net tangible book value per share after this
Offering................................................... 3.37
---------
Dilution to new investors.................................... $ 4.13
---------
---------
</TABLE>
In the event the Representative's Over-allotment Option is exercised in
full, the pro forma net tangible book value as of March 31, 1997 would have been
$12,433,000, or $3.67 per share of Common Stock, which would result in immediate
dilution in net tangible book value to new investors of approximately $3.83 per
share.
The following table sets forth as of the date of this Prospectus, with
respect to the Company's existing stockholders and new investors, a comparison
of the number of shares of Common Stock acquired from the Company (attributing
no value to warrants issued in conjunction with the sale of shares), the
percentage ownership of such shares, the total consideration paid, the
percentage of total consideration paid and the average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)................................ 1,084,013 35% $ 3,753,708 20% $ 3.46
New Investors........................................... 2,000,000 65% 15,200,000 80% $ 7.60
---------- --- ------------- ---
Total................................................... 3,084,013 100% $ 18,953,708 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
The above table assumes no exercise of the Representative's Over-allotment
Option. If the Representative's Over-allotment Option is exercised in full, new
investors will have paid $17,480,000 for 2,300,000
22
<PAGE>
shares of Common Stock, representing 82% of the total consideration for 68% of
the total number of shares of Common Stock outstanding. The foregoing also
assumes no exercise of outstanding warrants or options. See "Management--Stock
Option Plan," "Shares Eligible for Future Sale" and "Underwriting."
To the extent outstanding options or warrants or subsequently granted
options or warrants are exercised, there could be further dilution to new
investors. See "Shares Eligible for Future Sale" and "Management--Stock Option
Plan."
- ------------------------
(1) Does not include (i) 1,414,915 shares of Common Stock issuable upon exercise
of outstanding warrants (which number includes warrants to purchase 265,000
shares of Common Stock that will be issued upon completion of this Offering
and warrants to purchase 133,750 shares of Common Stock that are issuable
upon exercise of nominally priced warrants), with a weighted average
exercise price of $3.44 per share, (ii) 250,000 shares of Common Stock
subject to options available under the 1993 Plan, of which options to
purchase an aggregate of 239,490 shares of Common Stock with a weighted
average exercise price of $4.22 per share have been granted, and options to
purchase 10,510 shares of Common Stock remain available for future grants,
and (iii) 83,333 shares of Common Stock issuable upon conversion of
currently callable convertible promissory notes in the aggregate amount of
$625,000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Management--Stock Option Plan."
23
<PAGE>
SELECTED FINANCIAL DATA
The balance sheet data as of December 31, 1996 and the income statement data
for each of the years in the two years ended December 31, 1996 presented below
are derived from the Financial Statements of the Company, which have been
audited by Richard A. Eisner and Company, LLP, and are included elsewhere in
this Prospectus. The selected financial data for the year ended December 31,
1994, the three month periods ended March 31, 1996 and 1997, and the balance
sheet data as of March 31, 1997, were derived from unaudited financial
statements of the Company. These financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the financial position and the results of operations
for this period. The information presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
STATEMENTS OF OPERATIONS DATA:
Net revenues
Product sales............................ $ 0 $ 35,000 $ 216,000 $ 80,000 $ 51,000
Development funding(1)................... 541,000 315,000 0 0 0
----------- ----------- ----------- ----------- -----------
Total revenues........................... 541,000 350,000 216,000 80,000 51,000
----------- ----------- ----------- ----------- -----------
Costs and expenses
Cost of sales............................ 0 29,000 260,000 66,000 76,000
Development costs........................ 587,000 335,000 187,000 30,000 92,000
Selling, general and administrative...... 893,000 843,000 1,714,000 276,000 418,000
----------- ----------- ----------- ----------- -----------
Total costs and expenses..................... 1,480,000 1,207,000 2,161,000 372,000 586,000
----------- ----------- ----------- ----------- -----------
Interest expense............................. 0 17,000 333,000 35,000 89,000
----------- ----------- ----------- ----------- -----------
Net (loss)................................... (939,000) (874,000) (2,278,000) (327,000) (624,000)
Dividend on perferred stock.................. (238,000)
----------- ----------- ----------- ----------- -----------
Net (loss) after preferred dividend.......... $ (939,000) $ (874,000) $(2,516,000) $ (327,000) $ (624,000)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net (loss) per share(2)...................... $ (.69) $ (.62) $ (1.53) $ (.23) $ (.39)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Pro forma weighted average number of common
shares outstanding(2)...................... 1,353,000 1,403,000 1,484,000 1,431,000 1,591,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
----------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA
AS ADJUSTED
1994 1995 1996 ACTUAL PRO FORMA(3) (3)(4)
---------- ----------- ---------- ----------- ------------- -----------------
BALANCE SHEET DATA:
Working capital
(deficiency)............ $ (422,000) $(1,243,000) $ (654,000) $(1,916,000) $ (107,000) $ 10,612,000
Total assets (5).......... 394,000 436,000 463,000 645,000 2,648,000 $ 12,119,000
Notes payable............. 0 93,000 511,000 883,000 2,034,000 588,000
Total liabilities......... 589,000 1,273,000 1,543,000 2,227,000 3,202,000 1,366,000
Accumulated deficit....... (1,527,000) (2,401,000) (4,917,000) (5,541,000) (6,324,000) (7,747,000)
Stockholders' equity
(deficiency)............ (195,000) (837,000) (1,080,000) (1,582,000) (554,000) 10,753,000
</TABLE>
- ------------------------
(1) Development funding primarily consists of the direct investment by utilities
in the Company's research and development projects.
(2) See Note B of the Notes to the Financial Statements.
24
<PAGE>
(3) Adjusted to give pro forma effect to (i) a debt financing, the gross
proceeds of which were $2,000,000 and pursuant to which the Company issued
$2,000,000 of promissory notes and warrants to purchase an aggregate 240,000
shares of Common Stock, which resulted in an original issue discount to the
notes of $856,000, (ii) a private financing pursuant to which the Company
issued $290,000 of one-year promissory notes, which notes are convertible
into Common Stock at a price per share equal to the initial public offering
price per Share, and warrants to purchase an aggregate of 7,733 shares of
Common Stock, which resulted in an original issue discount to the notes of
$18,000, (iii) the conversion of $200,000 of promissory notes existing at
March 31, 1997 into 39,466 shares of Common Stock, (iv) the payment of
$136,000 to NCT for amounts owing, (v) the payment of $151,000 with respect
to promissory notes outstanding on March 31, 1997, (vi) the recognition of
the expense of $170,000 resulting from the increase in 26,750 shares of
Common Stock and warrants to purchase 26,750 shares of Common Stock
underlying warrants granted in a private financing, (vii) the issuance
80,000 shares of Common Stock to Baltimore Gas and Electric Company pursuant
to a Conversion and Subscription Agreement dated June 13, 1997 and the
recognition of a $540,000 expense in connection therewith, all of which
events occurred subsequent to March 31, 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(4) As adjusted to give effect to (i) the sale of the Securities offered hereby
(at an assumed initial public offering price of $7.50 per Share and $.10 per
Warrant), and initial application of the estimated net proceeds therefrom,
and (ii) the expense of $1,361,000 relating to the write-off of debt
discount and debt issuance costs. Does not give effect to the potential
repayment of $625,000 in convertible promissory notes that become payable on
demand upon completion of the Offering. See "Use of Proceeds."
(5) Includes technology rights. As of March 31, 1997, the balance of such rights
was $313,000.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QuietPower was incorporated in May 1992 and, to date, has devoted
substantially all of its resources to product and market development. In 1992,
the Company's activities consisted primarily of providing engineering design
services to industrial companies regarding the potential use of active noise and
vibration control. In May 1993, the Company entered into a series of marketing
agreements with NCT setting forth QuietPower's rights to market NCT's active
noise and vibration control products. In addition, during 1993, the Company, in
conjunction with NCT, focused on electric utility-funded projects, with respect
to active transformer quieting systems, Headsets and active diesel generating
quieting systems. In general, with respect to these projects, QuietPower
provided technical expertise and services, NCT provided technical expertise and
services and technology rights and the utilities provided funding and design
specifications for each product. Funding provided by the utilities was
recognized as development revenues by the Company.
In October 1994, the Company entered into the Distributor Agreement with NCT
with respect to the proposed Headset products. Throughout the year,
utility-funded projects continued and expanded, and the Company determined to
focus its primary development efforts on transformer quieting systems and
Headsets. In March 1995, QuietPower entered into the NCT Master Agreement, which
superseded the marketing agreements executed in May 1993, and provide, together
with the Distributor Agreement, the basis for the Company's current rights to
NCT's technology. During 1995, the Company completed its transformer quieting
system development projects. In the fourth quarter of 1995, QuietPower commenced
installation of its first ATQ-100 transformer quieting system at Public Service
Company of Colorado and commenced initial marketing of generic Headsets for
evaluation purposes. In addition, during 1995, feasibility studies regarding
failure diagnostic and condition monitoring commenced in conjunction with GE and
Baltimore Gas & Electric Company.
In 1996, the Company completed installation of its ATQ-100 system at Public
Service Company of Colorado and upgraded its prototype system at Commonwealth
Edison into a commercial ATQ-100 system. Marketing efforts, which were
constrained by lack of capital resources, focused on developing market
familiarity with the ATQ-100 by means of exhibitions at industry conferences and
seminars and development of brochures and videos. During the year, based upon
feedback from potential utility customers, the Company commenced its current
effort to further reduce the cost of the system components and installation of
the ATQ-100. Since 1994, total cost reductions for the ATQ-100 have ranged from
36% to 53%, depending upon the size and noise complexity of the transformers
involved. In 1996, the Company also continued to market Headsets for evaluation
purposes. Based upon customer response, the Company determined that engineering
modifications would be necessary to tailor Headsets to the needs of each
specific industry (e.g. the Power Industry or the railroad, oil and gas, mining
and pulp and paper industries). In addition, the Company entered into its Joint
Venture Agreements with ABB Secheron S.A. with regard to developing and
marketing the ATQ-100 system in Europe and with Prolec-GE with regard to
developing and marketing failure diagnostic condition monitoring products
world-wide.
Currently, the Company is marketing the ATQ-100 to a number of utilities,
which have proposed purchases under consideration. In view of the cost
reductions already effected and anticipated to be effected, the sales price of
the ATQ-100 has been lowered by the Company. As a result, the Company expects
that the gross profit relating to sales of the ATQ-100 system in the early part
of 1997 shall be nominal, but will increase over the course of the year as
further anticipated cost reduction measures are effected. With respect to
Headsets, QuietPower has recently completed development of a system specifically
designed for the railroad industry, which Headset unit is currently under
consideration for purchase by several large railroad companies. In addition,
modification efforts toward a Power Industry specific Headset are substantially
complete. The Company is currently in discussions with representatives of other
target industries for which it plans to modify the Headsets, as to the specific
needs of each industry. QuietPower is also continuing development work on its
failure diagnostic condition monitoring system in conjunction with Prolec-GE, an
air core reactor quieting system and an active magnetic field cancellation
26
<PAGE>
system. Finally, the Company anticipates that it will expand its product
offering by means of acquiring specific complementary technologies, products or
companies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
NET REVENUES--PRODUCT SALES. Product sales decreased $29,000 during the
three months ended March 31, 1997 from $80,000 for the three months ended March
31, 1996 compared to $51,000 for the three months ended March 31, 1997. Product
sales totaling $80,000 for the quarter ended March 31, 1996 were from the
installation of the ATQ-100 system at Public Service Company of Colorado and a
number of small orders of generic communications Headsets for evaluation
purposes. Product sales totaling $51,000 for the first quarter of 1997 were from
post-installation services relating to the ATQ-100 system installed at
Commonwealth Edison, the design and fabrication of an ATQ-100 system sold to
Sydkraft AB, a Swedish utility, for which installation is anticipated later in
1997, and continued evaluation sales of Headsets. The Company recognizes product
sale revenues with respect to the ATQ-100 system under the percentage of
completion method. In the first quarter of 1997, the Company granted an early
adoption discount in product sales price to Sydkraft AB for being the first
purchaser of the ATQ-100 system in Europe.
COST OF SALES. Cost of sales increased $10,000 for the three months ended
March 31, 1997 from $66,000 for the three months ended March 31, 1996 compared
to $76,000 in the three months ended March 31, 1997. These costs relate to the
product sales of ATQ-100 and the Headsets.
DEVELOPMENT COSTS. Development costs increased $62,000 for the three months
ended March 31, 1997 from $30,000 for the three months ended March 31, 1996
compared to $92,000 for the three months ended March 31, 1997. Development costs
for the first quarter of 1996 resulted from the Company's efforts toward product
optimization and cost reduction of the transformer quieting system. Development
costs in the first quarter of 1997 resulted from the Company's ongoing efforts
for product optimization and cost reduction of the transformer quieting system
and for costs associated with the Company's development efforts for its failure
diagnostic and condition monitoring products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $142,000 for the three months ended March 31,
1997 from $276,000 for the three months ended March 31, 1996 compared to
$418,000 for the three months ended March 31, 1997. This increase is primarily
attributable to expansion of the Company's selling and marketing efforts,
including increases in the production of marketing materials, the supply of
evaluation Headset units to potential customers and general overhead related to
marketing efforts.
INTEREST EXPENSE. Interest expense increased $54,000 from $35,000 for the
three months ended March 31, 1996 compared to $89,000 for the three months ended
March 31, 1997. This increase reflects the substantial increase in indebtedness
of the Company, and reflects the cost assigned to warrants issued with debt as
additional interest expense. For the three months ended March 31, 1996, there
was no interest expense related to the amortization of debt discount as compared
to $58,000 of interest expense related to the amortization of debt discount for
the first quarter of 1997.
With respect to debt financings, in May 1996 the Company raised $535,000, in
the first quarter of 1997, the Company raised $335,000 of debt and in April
1997, the Company raised $2,290,000 of debt. To account for the imputed interest
related to the warrants attached to the $535,000 debt, the principal amount of
the notes was discounted by $168,000 as of March 31, 1997. With respect to the
warrants attached to the $335,000 of debt, the principal amount of the notes was
discounted by $19,000 as of March 31, 1997. Finally, with respect to the
$2,290,000 of debt, the principal amount of the notes was discounted by $874,000
as of the date of issuance. The Company will realize these discounted amounts,
plus $435,000 in debt issuance costs, as interest expense over the period April
1, 1997 through the earlier of the effective date of the Offering or April 17,
1998.
The Company has entered into a Conversion and Subscription Agreement, dated
as of June 13, 1997, with Baltimore Gas and Electric Company ("BG&E") (the
"Conversion Agreement"). Pursuant to the Conversion Agreement, BG&E has agreed
to convert all of BG&E's rights to receive royalties from the
27
<PAGE>
sale of the Company's transformer quieting systems and purchase discounts on the
Company's transformer quieting systems into 80,000 shares of Common Stock.
BG&E's rights arise out of a series of agreements with the Company and NCT,
pursuant to which BG&E provided funding for the initial development of the
Company's transformer quieting system. See "Business--Utility Funded Development
Projects." The Company will recognize an expense of $540,000 in the quarter
ended June 30, 1997, to give effect to this transaction.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET REVENUES--DEVELOPMENT FUNDING. Development funding decreased $315,000 in
the year ended December 31, 1996 from $315,000 in the year ended December 31,
1995 compared to $0 in 1996. Development funding was recognized in 1995 from the
completion of two funded projects and one funded study. Final utility
transformer projects funded by Jersey Central Power & Light and Commonwealth
Edison were completed in April and August 1995, respectively, and the
feasibility study for failure diagnostics and condition monitoring funded by
Baltimore Gas & Electric Company was completed in December 1995. In 1996, the
Company determined not to seek such utility funding in view of its transition in
focus to commercial introduction of product and, therefore, recognized no
development revenues.
NET REVENUES--PRODUCT SALES. Product sales increased $181,000 in the year
ended December 31, 1996 from $35,000 in the year ended December 31, 1995
compared to $216,000 in 1996. Product sales totaling $35,000 in 1995 were from
the initiation of the ATQ-100 installation at Public Service Company of Colorado
and a number of small orders of generic communications Headsets for evaluation
purposes. Product sales totaling $216,000 in 1996 include revenues from the
installation of the ATQ-100 at Public Service Company of Colorado, the upgrade
of a prototype system to the ATQ-100 system at Commonwealth Edison and continued
evaluation sales of the Headsets.
DEVELOPMENT COSTS. Development costs decreased $148,000 in the year ended
December 31, 1996 from $335,000 in the year ended December 31, 1995 compared to
$187,000 in 1996. Development costs in 1995 included the Company's contributions
to utility funded development projects, which varied in amount depending upon
the scope of the project and the amount of utility contributions. Development
costs in 1996 resulted from the Company's efforts for product optimization and
cost reduction of the transformer quieting system, and initial development
efforts for the European market.
COST OF SALES. Cost of sales increased $231,000 in the year ended December
31, 1996 from $29,000 in the year ended December 31, 1995 compared to $260,000
in 1996. These costs relate to the product sales of the ATQ-100 and the
Headsets. This increase is principally due to the increase in product sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $871,000 in the year ended December 31, 1996
from $843,000 in the year ended December 31, 1995 compared to $1,714,000 in
1996. This increase is primarily the result of an increase of $374,000
reflecting the cost assigned to stock options and warrants issued in exchange
for services. Other increases related to the Company's activities to bring more
of its technical capabilities in-house and to bring its commercial products to
market. Specifically, salaries and staff related costs increased by $181,000
which was the result of hiring additional staff, pay increases, and the
allocation of costs related to the assignment of staff to sales activities.
Market development expenditures increased by $112,000 and reflected the creation
of marketing materials, participation at trade conferences and exhibitions,
increased travel expenditures, and the supply of evaluation Headset units to
potential customers.
INTEREST EXPENSE. Interest expense increased $316,000 in the year ended
December 31, 1996 from $17,000 in the year ended December 31, 1995 compared to
$333,000 in 1996. This increase reflects the substantial increase in
indebtedness of the Company, and reflects the cost assigned to warrants issued
with debt as additional interest expense. For 1995, there was no interest
expense related to the amortization of debt discount as compared to $138,000 of
interest expense related to the amortization of debt discount for 1996. See
"Liquidity and Capital Resources."
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had a working capital (deficit) of
$(1,916,000) and a stockholders' (deficit) of $(1,582,000), as compared to a
working capital (deficit) of $(654,000) and a stockholders' (deficit) of
$(1,080,000) at December 31, 1996. The Company has to date financed its
operations through development projects funded by electric utilities, direct
equity and debt financings, and a limited amount of commercial sales.
Net cash used in operating activities was $261,000 for the three months
ended March 31, 1997 as compared to $214,000 for the three months ended March
31, 1996. The increase in cash used in operations is primarily the result of the
increase in the net loss of the Company of $297,000 reduced by $49,000 to
reflect the increase in non-cash expenditures and $175,000 to reflect changes in
accounts payable and accrued expenses. Net cash used in investing activities was
$32,000 for the three months ended March 31, 1997 as compared to $6,000 for the
three months ended March 31, 1996. The increase was primarily attributable to
the payment to NCT of a portion of the amounts owed by the Company under the NCT
Master Agreement. Net cash provided by financing activities was $293,000 for the
three months ended March 31, 1997 as compared to $200,000 for the three month
period ended March 31, 1996. The increase was primarily attributable to one
private financing during the first quarter of 1997, the proceeds of which were
used to fund its operating activities. At March 31, 1997, the Company had cash
of $6,000.
Net cash used in operating activities was $1,604,000 for the year ended
December 31, 1996 as compared to $385,000 for the year ended December 31, 1995.
The increase in cash used in operations is primarily the result of the increase
in the net loss of the Company of $1,404,000, (i) reduced by $628,000 to reflect
the increase in non-cash expenditures, (ii) increased to reflect net changes in
accounts receivable of $223,000, and (iii) increased to reflect changes in
accounts payable and accrued expenses of $202,000. Net cash used in investing
activities was $190,000 for the year ended December 31, 1996, as compared to
$7,000 for the year ended December 31, 1995. The increase in cash used in
investing activities was primarily attributable to the payment to NCT of a
portion of the amounts owed by the Company under the NCT Master Agreement. Net
cash provided by financing activities was $1,780,000 for the year ended December
31, 1996 as compared to $290,000 for the year ended December 31, 1995. The
increase in cash provided by financing activities is primarily attributable to
two private financings of the Company, the proceeds of which were used to fund
its operating activities. At December 31, 1996, the Company had cash of $6,000.
Since inception, the Company has received an aggregate of $1,189,000 from
seven electric utilities for the purpose of developing the Company's active
noise and vibration control technology. Project fees were received as follows:
<TABLE>
<CAPTION>
YEAR PROJECT FEES
- -------------------------------------------------------------------------------- ------------
<S> <C>
1992............................................................................ $ 9,000
1993............................................................................ 515,000
1994............................................................................ 532,000
1995............................................................................ 133,000
1996............................................................................ 0
------------
$ 1,189,000
------------
------------
</TABLE>
The Company also received project funding from utilities of $10,000 and
$174,000 in 1994 and 1995, respectively, for developing its failure diagnostic
and condition monitoring technology. Typically, the agreements with utilities
provide for a return on the above funded amounts through royalties to be paid on
future product sales, which royalties could total up to $2.2 million. The
Company did not seek project funding in 1996.
In 1992, through a private placement of its Common Stock, the Company issued
an aggregate of 130,000 shares at a price of $2.50 per share, for which it
received gross proceeds of $325,000. In 1993, through a private placement of its
Common Stock, the Company issued an aggregate of 30,000 shares also at a price
of $2.50 per share, for which it received gross proceeds of $75,000.
29
<PAGE>
In January 1994, through a private placement of its Common Stock, the
Company issued an aggregate of 20,000 shares at a price of $2.50 per share, for
which it received gross proceeds of $50,000. In November 1994, the Company
completed a private placement of 97,366 shares of Common Stock at a price of
$8.77 per share, for which it received gross proceeds of $853,900.
In July and August 1995, the Company raised gross proceeds of $75,000 in
exchange for 18,750 units, each of which consisted of one share of Common Stock
and one warrant to purchase a share of Common Stock at an exercise price of
$6.00 per share, at a price of $4.00 per unit. Also, in July of 1995, the
Company raised gross proceeds of $25,000 through an offering of debt with
warrants attached. The debt was evidenced by a promissory note bearing an
interest rate of 6% per annum with a due date of January 27, 1996. The principal
and interest were converted into 7,523 shares of Common Stock in April 1997 at a
conversion price of $4.00 per share. The warrants are for the purchase of 6,250
shares of Common Stock at an exercise price of $6.00 per share.
In October 1995, the Company raised gross proceeds of $100,000 in exchange
for 14,706 units, each of which consisted of one share of Common Stock and one
warrant to purchase a share of Common Stock at an exercise price of $6.80 per
share, at a price of $6.80 per unit.
In November 1995 and January 1996, in exchange for a promissory note with
interest in the form of warrants, the Company raised gross proceeds of $88,000.
The transaction also provided for additional warrants to be issued if the term
of the loan was extended beyond March 31, 1996. Final payment of the note
occurred in October 1996 at which time warrants were issued for the purchase of
45,000 shares of Common Stock at an exercise price of $2.50 per share.
In February 1996, the Company raised gross proceeds of $68,000 in exchange
for 10,000 units, each of which consisted of one share of Common Stock and one
warrant to purchase a share of Common Stock at an exercise price of $6.80 per
share, at a price of $6.80 per unit.
In April 1996, the Company raised gross proceeds of $25,000 through an
offering of debt with warrants attached. The debt was evidenced by a promissory
note bearing an interest rate of 12% per annum. The warrants are for the
purchase of 3,676 shares of Common Stock at an exercise price of $3.625 per
share. Principal and interest of the note were repaid in September 1996.
In March and April 1996, the Company raised gross proceeds of $175,000
through four debt with warrant issuances. All issuances were evidenced by
convertible promissory notes bearing interest rates at 12% with terms ranging
from September through October 1996. The principal and interest were converted
into 31,943 shares of Common Stock in April 1997. Of the promissory notes,
$125,000 were converted at $6.80 per share and $50,000 were converted at $5.00
per share. The warrants are for the purchase of 21,176 and 2,500 shares of
Common Stock at exercise prices of $3.625 and $6.80 per share, respectively.
In May 1996, the Company raised $535,000 through a debt financing with
DayStar Partners, L.P., a venture capital firm, and certain other venture
capital investors (the "May 1996 Financing"). This debt is evidenced by notes
which provide for the repayment of the principal and interest at the earlier of
an initial public offering or in four quarterly installments commencing in
February 1997. Accordingly, this debt is repayable upon consummation of this
Offering and the Company intends to use a portion of the proceeds of this
Offering for that purpose. Substantially all of the Company's assets secure
repayment of this loan. Through November 24, 1996 the notes bore interest at the
annual rate of 12%, and 15% thereafter. By a letter agreement dated April 9,
1997, it was agreed that a quarterly installment of $133,750 would be paid in
April 1997, with the remaining principal due on the earlier of the consummation
of this Offering or January 15, 1998, and that the notes would continue to bear
interest at the rate of 15% (effective interest rates, giving effect to the
value of the warrants, ranging from 194% to 246%). The terms of the transaction
also provided that warrants exercisable at $.01 per share to purchase 133,750
shares of Common Stock and warrants to purchase 133,750 shares of Common Stock,
at a per share exercise price equal to that of any warrants offered in an
initial public offering of the Company's securities, be issued.
In December 1996, the Company completed a private placement of 1,325 shares
of Series A Convertible Preferred Stock, at a price of $1,000 per share, for
which it received gross proceeds of $1,325,000. Each share of Series A
Convertible Preferred Stock shall automatically convert upon the
30
<PAGE>
completion of this Offering at a price of $5.00 per share, into 200 shares of
Common Stock and warrants to purchase 200 shares of Common Stock at a per share
price of $2.50. The holders of the Series A Convertible Preferred Stock were
guaranteed a 35% annual rate of return on their investment, through the
completion of the Company's initial public offering. In this connection, to the
extent such holders do not realize a 35% rate of return on their investment upon
completion of this Offering, they shall receive additional shares of Common
Stock. In addition, subject to the Representative's consent, such holders shall
have the right to purchase a portion of the Securities (but in no event more
than 10% of the Securities), such that each holder shall maintain its percentage
interest in the Company.
In April 1997, the Company raised $2,000,000 through a debt financing with
QPS Bridge, LLC and Regent Capital Management, L.P. This debt is evidenced by
notes which bear interest at the annual rate of 11% (effective interest rate,
giving effect to the value of the warrants, of 85.7%) and provide for repayment
of the principal and interest at the earlier to occur of one or a series of
public and/or private offerings of securities of the Company or any sale of
assets, merger, recapitalization or other capital transactions with aggregate
gross proceeds to the Company of not less than $4,000,000 or April 17, 1998.
Accordingly, this debt is repayable upon consummation of this Offering and the
Company intends to use a portion of the proceeds of this Offering for that
purpose. Substantially all of the Company's assets secure repayment of this
loan, subordinate to the repayment of the May 1996 Financing. The terms of the
transaction also provided that warrants to purchase 240,000 shares of Common
Stock, at an exercise price equal to the lesser of $3.75 or one-half of the
price per share of Common Stock offered to the public in an initial public
offering of the Company's securities, be issued.
In February, March and April 1997, the Company also raised gross proceeds
aggregating $625,000 through an offering of debt with warrants attached. The
debt was evidenced by promissory notes bearing an interest rate of 10% per annum
(effective interest rate, giving effect to the value of the warrants, of 16.9%).
The warrants are for the purchase of a total of 16,667 shares of Common Stock,
at an exercise price per share equal to the lower of $6.00 or one-half of the
price per share of Common Stock offered to the public in an initial public
offering of the Company's securities.
The Company believes that the net proceeds from the Offering, together with
net cash from operations, should be sufficient to satisfy the Company's cash
requirements for at least 12 months from the date of this Prospectus.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
The Financial Accounting Standards Board has issued Statement No. 123
"Accounting and Disclosure of Stock-Based Compensation" ("SFAS 123") in October
1995, which is effective for 1996. SFAS 123 requires companies to estimate the
fair value of common stock, stock options or other equity instruments ("Equity
Instruments") issued to employees, using pricing models which take into account
various factors, such as the current price of the common stock, volatility and
the expected life of the Equity Instrument. SFAS 123 permits companies to elect
either to provide pro forma note disclosure or adjust operating results for the
amortization of the estimated value of the Equity Instrument as compensation
expense over the vesting period of the Equity Instrument. The Company has
elected to provide pro forma note disclosure, which appears in its financial
statements for the year ended December 31, 1996, and therefore, the adoption of
SFAS 123 has no effect on the Company's financial position or results of
operations. See Note H of the Notes to the Financial Statements.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards of approximately $4,340,000
which commence expiring in the year 2007. The amount of net operating loss
carryforward that can be used in any one year will be limited by the applicable
tax laws which are in effect at the time such carryforward can be utilized. As a
result of ownership changes resulting from recent sales of equity securities,
the Company's ability to use the loss carryforwards may be subject to
limitations as defined in Section 382 of the Internal Revenue Code of 1986, as
amended. Pursuant to Section 382, the change in ownership resulting from the
Offering and any other future sale of stock may limit utilization of future
losses in any one year. The annual limitation and the timing of attaining
profitability may result in the expiration of net operating loss carryforwards
before utilization.
31
<PAGE>
BUSINESS
GENERAL
QuietPower Systems, Inc. ("QuietPower" or the "Company") is engaged in the
development, commercialization and marketing of products utilizing two
acoustically based technologies: (i) active noise and vibration control and (ii)
failure diagnostic and condition monitoring. The Company's active noise and
vibration control technology uses equal but opposite noise signals to reduce or
cancel noise emissions. QuietPower has used the active noise and vibration
control technology to develop its initial commercial products, including the
ATQ-100, a transformer quieting system which reduces the sound emanating from
electric power distribution transformers. The Company has also commenced
marketing its communication headset systems ("Headsets"), which reduce noise and
enhance communications in high noise industrial environments. QuietPower is
currently engaged in a joint venture with ABB Secheron S.A., an indirect
wholly-owned subsidiary of ABB Asea Brown Boveri Limited ("ABB"), for the
purpose of developing and marketing the ATQ-100 in the European market. The
Company's failure diagnostic and condition monitoring technology is to be
utilized to detect sound emissions that signal imminent equipment failure.
QuietPower is engaged in a joint venture with Prolec-GE, de S. de R.L. de C.V.
("Prolec-GE"), a joint venture between the General Electric Company ("GE") and
Prolec S.A. de C.V., for the purpose of developing a failure diagnostic and
condition monitoring line of products for use with transformers and other
substation equipment. The primary market for the Company's current and proposed
products is the worldwide electric utility (power generation, transmission and
distribution) and supply industries (the "Power Industry").
The Company has entered into a world-wide exclusive manufacturing, marketing
and distribution agreement with Noise Cancellation Technologies, Inc. ("NCT").
This agreement covers all of NCT's proprietary active noise and vibration
control technology and products relating to the Power Industry and grants the
Company world-wide exclusive rights within the Power Industry. The ATQ-100 and
the Headsets utilize the active noise and vibration control technology to
electronically reduce noise and vibration. Software-based algorithms, used in
conjunction with certain controlling, sensing and actuating hardware components,
act together as a digital signal processor to analyze noise emissions and
produce equal and opposite noise signals. When the two signals meet, the noise
is reduced or canceled. The Company's proposed failure diagnostic and condition
monitoring systems will also utilize digital signal-based technology.
The Company's principal operating strategy is to develop and position
products that take advantage of opportunities arising from the significant and
ongoing changes in the Power Industry. The Power Industry is a multibillion
dollar capital-intensive industry. The Company anticipates that the current move
toward deregulation in the North American and European electric utility
industries will increase market demand for companies which offer products that
reduce utilities' operating costs, enhance equipment efficiency and flexibility
and extend the expected useful lives of fixed assets. In addition to the Power
Industry, QuietPower plans to market its products to other capital-intensive
markets. To date, the Company has commenced marketing its Headsets to the
railroad and communication industries. The Company also intends to employ a
growth strategy pursuant to which it will identify and develop additional
products related to its core technologies and products. In this respect, it has
recently commenced development efforts on its active magnetic field control and
cancellation technology, which functions similarly to the active noise and
vibration control technology. The Company also intends to acquire outside
synergistic or alternative technologies and products. The Company has not yet
entered into discussions nor does it have any understandings with respect to any
companies or technologies which it may wish to acquire. The Company currently
intends to seek acquisition opportunities shortly after the completion of this
Offering and intends to use a portion of the net proceeds of this Offering in
furtherance of this acquisition strategy.
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THE POWER INDUSTRY MARKET
Within the Power Industry, electric utilities represent the largest
potential market for transformer quieting systems, failure diagnostic and
condition monitoring systems, air core reactor quieting systems and active
magnetic field control and cancellation systems. Among the roughly 3,100
electric companies in North America, 244 are investor-owned utilities ("IOU's").
These utilities have been specifically targeted by QuietPower because revenues
from these 244 utilities represent an estimated 79% of all electric power sales.
In addition, these IOU's have assets totalling an estimated $585 billion and
operating revenues of an estimated $177 billion, making it one of the largest
industry segments in North America. Electric utility operations are also very
capital-intensive; of these utilities' $585 billion in assets, approximately
$408 billion represent fixed assets. Between 1966 and 1991, an estimated 192,000
power transformers were shipped to purchasers.
The change in the North American electric utility sector of the Power
Industry has been substantial in the last decade. Historically, utilities have
operated in a highly regulated environment, with the impact of major capital
expenditures on billable rates being subject to regulatory oversight.
Competition was significantly lacking in this environment. Over the past several
years, a major nationwide trend toward deregulation of electric utilities was
initiated, and is currently progressing at various rates across the United
States. The effect of deregulation is to encourage the commencement of
competition. In response, utilities have been downsizing and focusing on
increased productivity and operating cost reductions. In addition, the Company
believes that competitive considerations will cause electric utilities to adopt
positive public relation and good neighbor policies, such as reducing the sound
levels of noisy transformers. The Company believes that the current changes
provide significant opportunities for companies like QuietPower which offer
products that reduce utilities' operating costs, enhance equipment efficiency
and flexibility, extend expected useful lives of valuable fixed assets and
provide positive public relations impressions.
In addition, as environmental consciousness is raised throughout the
country, the Company believes that local governments may seek to further curb
noise pollution and increase the stringency of existing noise regulations. This
would have the effect of increasing demand for noise quieting products, such as
those of the Company, although there can be no assurance with respect thereto.
See "Governmental Regulation."
Europe represents another significant potential market for the Company's
products. The overall European power generation and power consumption markets
for 1995 were 48% and 78%, respectively, of the United States market.
Deregulation, and the concomitant concern about competition, is also beginning
to take place in some European Union countries. A European Union directive
adopted in 1996 sets out a framework for the deregulation of the electricity
market in member countries beginning in 1998. It is up to each member of the
Union to determine how detailed implementation of the directive should be
handled. Generally, the framework provides for the independent operation of
utilities' transmission assets so as to open access to independent suppliers of
power. In addition the framework also proposes mechanisms for power sales to
retail customers. Member countries of the European Union include Great Britain,
France, Italy, Germany, Spain, Portugal, Belgium and Austria. The larger
integrated electric utilities in Switzerland (not a member of the European
Union) are in the process of unbundling their services and some distribution
companies have been sold to private entities.
The Company intends to market its products in industrialized international
markets. The Company's competitiveness in overseas markets may be negatively
impacted if there is a significant increase in the value of the dollar against
the currencies of the other countries in which the Company does business.
Further, the laws of certain foreign countries may not protect the Company's
proprietary rights to the same extent as the laws of the United States. See
"Risk Factors--Risk of International Operations."
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BUSINESS STRATEGY
The Company's principal operating strategy is to develop and position
products that take advantage of opportunities arising from the significant and
ongoing changes in the Power Industry. The Company believes that the current
move toward deregulation in the Power Industry will put a priority on finding
ways to succeed in a soon-to-be highly competitive environment. In addition to
the Power Industry, QuietPower anticipates, where appropriate, to market
products to other capital-intensive industries (e.g., the railroad and mining
industries), which is the Company's current marketing strategy with respect to
the Headsets.
The Company has identified two sources of potential growth in addition to
sales of its current and proposed products, which sources will be the focus of
its middle to long-term operating strategy. One source of growth involves the
identification and internal development of additional products related to the
Company's core technologies and markets. The second contemplates the acquisition
of outside technologies and products through the purchase of ongoing businesses
so as to add function to existing products or broaden product lines for
QuietPower's target markets. The Company believes that these strategies will (i)
help achieve long-term revenue growth, (ii) through the acquisition of
synergistic or alternative technologies, enable the Company to broaden its
technology base and therefore be less dependent on a small number of
technologies, and (iii) add other products and services to its current products
and allow the Company to be viewed by utilities as a full service provider of
technology solutions.
NEW APPLICATIONS. Internal development involves the identification of new
applications within the Company's targeted industry markets using active noise
and vibration control technology, failure diagnostic and condition monitoring
technology and active magnetic field control and cancellation technology. The
Company may seek to conduct such development with joint venture partners or
through utility funded projects. With respect to development efforts covered by
the NCT Master Agreement, the Company is entitled to receive either direct
ownership of or exclusive or non-exclusive licenses for any new products
developed.
ACQUISITIONS. The acquisition of outside technologies and products may be
effected by acquiring specific technology rights, acquiring products or product
lines, or acquiring an entity (through stock or asset purchases) that possesses
desired assets. The acquisition of technology rights may, in appropriate cases,
be effected through exclusive, or non-exclusive, licensing. QuietPower's current
expansion strategy involves identifying and obtaining the rights to technologies
and products which the Company believes would complement its products, expand
market reach, and/or provide some degree of added control over the delivery of
products into the marketplace. Complementary technologies would be those that
can be used by the Company's targeted markets to enhance performance and/or
reliability of their equipment base. QuietPower's expertise and extensive
knowledge of the Power Industry will be utilized to identify and make
appropriate acquisitions. The Company has not yet entered into discussions with
any companies, nor are there any understandings with respect to any companies or
technologies which it may wish to acquire. The Company currently intends to seek
acquisition opportunities shortly after the completion of this Offering and
intends to use a portion of the net proceeds of this Offering in furtherance of
this acquisition strategy. See "Use of Proceeds."
MARKETING. The Company believes that utilities look to its products for a
variety of reasons. Compliance with environmental noise ordinances is one of
several important components to the market acceptance of the Company's active
noise and vibration control-based products. Other factors include the Power
Industry's desire to improve relations with its customer base, to create
stronger customer loyalty, and to reduce potential litigation by becoming more
sensitive to environmental issues affecting the community, such as noise. Given
new concerns regarding competition, products that enhance productivity may be
viewed by utilities as an important step towards improving their competitive
stance. Therefore, QuietPower's promotional efforts attempt to show potential
customers that the Company's products offer operational efficiency, maintenance
solutions and facilitated safety communications.
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Historically, the Company has focused its attention almost exclusively on
the North American marketplace due to practical, logistical and cost concerns.
The Company believes that its recent execution of the joint venture agreement
with Prolec-GE (the "GE-JV Agreement") will assist it in gaining access to a
large section of the North American Power Industry market. More recently the
Company has sought to establish additional marketing alliances in Europe with
both manufacturers of substation equipment as well as end-user utilities. The
Company believes that the joint venture agreement with ABB Secheron S.A. (the
"ABB JV Agreement") will provide QuietPower with a means of penetrating the
European market. Currently, the Company is in discussions with several
additional European companies to establish development and marketing partners in
Europe in connection with both air core reactor quieting and active magnetic
field cancellation technology. See "Joint Venture Agreements."
With respect to the Headset product, its initial commercialization meant the
introduction of QuietPower's first product that was ready for commercial sale.
The Company has also identified industries outside the Power Industry where the
need for worker communication in high noise environments is important. Marketing
efforts to date have relied heavily on the railroad industry, but have also
included the Power Industry, the armed forces, the paper and pulp industry, the
oil and gas industry and the mining industry. Based upon customer feedback, the
Company is modifying the Headsets to make them industry specific.
In order to develop product awareness, the Company has published articles
for industry trade and technical journals, and attempts to receive press
coverage in industry trade journals. QuietPower's technical staff have presented
papers at utility sponsored conferences, trade shows and meetings. In addition,
the Company has developed video tapes showing industry relevant technology
applications, and prepared case studies and specification sheets. QuietPower has
also involved electric utilities in all stages of development and
commercialization for various product market segments. Several large utility
companies have invested funding in QuietPower's work, and served as test sites
for the technology under development. See "Utility Funded Development Projects."
ACTIVE NOISE CONTROL TECHNOLOGY AND PRODUCTS
Active noise and vibration control technology reduces noise and vibration,
which manifest themselves as wave forms, through the process known as
"destructive interference." The source noise signal is measured, analyzed and
canceled, using digital signal processing based algorithms, in conjunction with
controlling, sensing (e.g., microphones) and actuating hardware components
(e.g., resonant acoustic devices, piezo ceramics or speakers). The noise wave
characteristics (or vibration characteristics when it travels through a solid
substance) are analyzed by the active noise and vibration control algorithms,
and an equal and opposite (180 degrees out of phase) noise signal is generated
through the actuating hardware to cancel the source signal. Active noise
reduction can be used for airborne acoustic signals, vibration in solid
structures and vibration in fluids.
The active noise and vibration control technology can be utilized for a wide
range of applications. The Company is currently marketing two of its products,
the transformer quieting systems and Headsets, to the Power Industry, and
believes that one of its potential products, the air core reactor quieting
systems, is marketable to this industry as well. In addition, the Company is
currently marketing the Headsets to other capital-intensive industries.
TRANSFORMER NOISE QUIETING. Utilities generate electricity at various
locations around the country. This electricity must be sent from a power
generating plant to the electrical utility customers. To accomplish this,
utilities transmit the electricity at extremely high voltages through power
lines to various distribution points called substations. At these substations,
utilities place "distribution transformers" to convert, or step down, the high
voltage transmissions, which can be in the hundreds of kilovolts, to a safe and
useable voltage. These distribution transformers, with ratings from .5
million-volt-amperes ("MVA") to over 100 MVA, operate in fundamentally the same
way. Inside each transformer is a magnetic core, surrounded by
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high and low voltage windings. The magnetic field created in the core causes the
core and windings to vibrate in relation to the AC line frequency. These
vibrations correspond to twice the line frequency and its multiple harmonics.
North American transformers use a line frequency of 60 Hertz ("Hz"), thus the
vibration produced is at multiples, or harmonics of, this line frequency (i.e.,
240 Hz, 360 Hz, etc...). This vibration is transmitted to the outside surface of
the unit and is radiated out into the substation and surrounding neighborhood in
the form of tonal noise. Due to their low frequency, these tones carry for
extended distances. Although there are similarities in the general noise
characteristics of transformers, sound levels from each transformer will vary
depending on a given transformer's structural geometry, as well as the load that
it is carrying at any given time. The ATQ-100 transformer quieting system
continuously measures and analyzes each of these readings and adjusts its
opposing noise signals to achieve optimal sound cancellation.
Utilities may seek to quiet transformers for a variety of reasons, including
the reduction of noise complaints from neighboring properties and to comply with
noise ordinances that may exist. See "Business Strategy--Marketing" and
"Governmental Regulation." Traditional passive quieting solutions for existing
transformers require the construction of barrier walls around the unit. However,
low frequency tones produced by transformers not only travel greater distances
than high frequency tones, but are more difficult to block with a barrier wall.
Since low frequency sound waves can travel through and refract around barrier
walls, these walls must be built according to rigorous specifications that can
result in significant installation costs. Barrier walls can also interfere with
overhead buswork, obstruct the maintenance of transformers and cause heat to
build up, forcing utilities to reduce transformer load, resulting in decreased
efficiency. For utilities installing new transformers, an alternate quieting
solution is to purchase a "low noise" unit using heavier, stiffened materials.
While these units are quieter than other standard transformers, the use of
special materials in their construction leads to a much higher acquisition cost
per unit.
QuietPower, in conjunction with NCT engineers, completed development of the
initial prototype of a transformer quieting system in 1993. From 1992 to 1995,
the Company engaged several utilities in all stages of the commercialization of
the transformer quieting systems. Prototype quieting systems were installed on
various transformers in order to, among other things, research product
reliability and optimization testing. During this period, utilities invested
approximately $816,000 in QuietPower in connection with these development
projects. See "Utility Funded Development Projects."
The Company's first commercial transformer noise quieting product, the
ATQ-100, was installed at Public Service Company of Colorado on two 20 MVA
transformers in Lafayette, Colorado. Installation commenced in October 1995 and
was completed in May 1996. In addition, between August 1996 and January 1997,
the Company converted a prototype transformer quieting system into a commercial
ATQ-100 system for Commonwealth Edison in Rockford, Illinois, on four
transformers, ranging in size from 20 to 50 MVA. Prototype transformer quieting
systems using a digital signal processing based controller, in conjunction with
multiple sensing (e.g., microphones) and actuating devices (e.g., resonant
acoustic devices and piezo ceramic transducers), were installed at Manitoba
Hydro in December 1993, Baltimore Gas & Electric in December 1994, and Jersey
Central Power & Light in April 1995. The size of these transformers ranges from
7.5 MVA to 45 MVA. Use of the transformer quieting systems has resulted in noise
reductions of up to 30 decibels ("dB") for the lower frequency tones, which
tones are the most problematic for traditional quieting technologies. Similar
noise reductions would most likely be sufficient to bring virtually any
transformer into compliance with noise regulations and ordinances throughout
North America. See "Governmental Regulation."
Based upon market feedback, the Company has determined that the initial
sales price of the ATQ-100 has inhibited widespread market acceptance.
Accordingly, during 1996, QuietPower accelerated its efforts to reduce the cost
of the system components and installation of the ATQ-100. In this connection, in
view of the cost reductions already effected and anticipated to be effected, the
ATQ-100 sales price has been lowered by the Company. As a result, the Company
expects that the gross profit relating to sales of the
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ATQ-100 in the first half of 1997 will be nominal. The Company expects to use a
portion of the net proceeds of this Offering to continue such further
development. See "Risk Factors--Limited Sales History; Need for Cost Reduction
of ATQ-100 and Modification of Headsets; Substantial Time Lapse Until Additional
Commercial Product Introduction," "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
INDUSTRIAL COMMUNICATION HEADSETS. The Company's Headsets are designed to
improve worker safety and productivity through the enhancement of communications
by selectively canceling surrounding noise from loud machinery or engines using
the active noise and vibration control technology. Accordingly, these Headsets
facilitate communication between co-workers, enable them to hear warning
signals, and reduce noise related fatigue. The prototype generic Headsets
developed by NCT in cooperation with the Company and Manitoba Hydro have been
fully commercialized and are available as products. The Company commenced
selling the Headsets in the third quarter of 1995. The Headsets are designed to
be portable, as well as lightweight and comfortable. Independent tests performed
by an outside contractor on behalf of NCT have assigned the Headsets a Noise
Reduction Rating (or "NRR") of 21dB. NRR's are assigned based on a series of
standardized tests that are performed on hearing protection devices to determine
noise reductions at the ear. Tests on Headset effectiveness conducted by NCT
have shown noise reductions of 20 dB in the 30 to 500 Hz frequency ranges.
However, the Company believes that in order to make significant sales to any
industry, the Company will have to further modify the current generic Headset
system to meet the specific needs of each industry. Based on feedback from
potential railroad customers, the Company has recently modified the Headsets to
tailor them to the needs of the railroad industry. Modifications have included
developing new microphone and intercom electronics and protocols, redesigning
the external structure of the Headsets and modifying mounting devices. This
system allows the personnel present in the locomotive cab to communicate with
one another as well as with the railroad dispatcher and to more readily hear
warning signals. Revenues from the railroads to date are nominal and reflect the
sale of seven demonstration Headset systems. In addition, modification efforts
toward a Power Industry specific Headset are substantially complete. The Company
is currently in discussions with representatives of other target industries for
which it plans to modify its Headsets, including mining, paper and pulp
processing, the armed forces, and oil and gas, as to the specific needs of each.
A portion of the net proceeds of this Offering has been allocated toward these
development efforts. See "Risk Factors -- Limited Sales History; Need for Cost
Reduction of ATQ-100 and Modification of Headsets; Substantial Time Delay Until
Additional Commercial Product Introduction," "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
AIR CORE REACTOR NOISE QUIETING SYSTEMS. Air core reactors are used by
utilities at substations during the distribution process. Air core reactors act
like surge protectors to regulate voltage levels and act as line voltage
stabilizers. Electrical excitation of the reactor's core leads to vibration and
noise escalation. The noise characteristics of reactors are similar to those of
transformers, in that low frequency noise at 120 Hz dominates the reactor's
overall noise signals. The Company has measured noise generated by air core
reactors as high as 90 dB. The Company believes that minor modifications of the
transformer quieting system's software and hardware could result in a reactor
quieting product. QuietPower is currently in discussions with an air core
reactor manufacturer to develop a prototype air core reactor noise quieting
system. There can be no assurance that the Company will be successful in its
attempt to develop or commercialize a reactor quieting system.
SUBSTATION FAILURE DIAGNOSTIC AND CONDITION MONITORING PRODUCTS
Proposed failure diagnostic and condition monitoring systems are being
designed to be used by utilities to detect imminent equipment breakage or
failure in transformers and other substation equipment; occurrences which are
expensive and sometimes dangerous to substation personnel and property. The
aging of electrical power systems has increased the importance of monitoring the
condition of the equipment that comprise these systems. Transformer failures are
known to be associated with degradation
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of the transformer's insulation. This degradation produces certain electrical
charges within the transformer known as partial discharge. The electric partial
discharge signals also generate high frequency acoustic waves, which can be
detected using acoustic sensors. Accurate and precise acoustic readings of
partial discharge, analyzed in a meaningful interpretative context, are expected
to provide valuable information to substation operators for preventive
maintenance.
A year long feasibility study by the Company in conjunction with GE's Power
Transformer division and Baltimore Gas & Electric Company was completed in
December 1995. On the basis of this study, the Company, pursuant to a joint
venture agreement with Prolec-GE, is currently developing a failure diagnostic
and condition monitoring system for power transformers. The joint venture may
also use QuietPower's technology to develop other acoustically-based failure
diagnostic systems for use with load-tap changers, high voltage instrument
transformers and circuit breakers. See "Joint Venture Agreements-- GE Joint
Venture." The proposed failure diagnostic and condition monitoring systems will
utilize sensors to collect acoustic data which will provide an on-line
assessment of the transformer's operating condition to the Power Industry
customer. The proposed system is being designed to be a digitally based
analytical system that reads, stores and analyzes large amounts of acoustic
data. The system is intended to provide real time condition monitoring for
transformers where data are communicated via a data-link to central operating
stations. Basic hardware components will include ultrasonic sensors, a
microprocessor and data-link equipment.
A line of products based on the failure diagnostic and condition monitoring
technology is currently being developed by the Company. The first proposed
product is a partial discharge (or failure) locator. This product is being
designed to be used in transformer testing, maintenance and repair shops to
pinpoint the source of a failure, which will significantly reduce the amount of
time required for testing and repair. A second proposed product is a continuous
on-line condition monitoring system, which will allow remote monitoring of a
transformer's operating condition and will be designed to alert the system
operator in the event of deterioration in performance. This proposed product
will be designed to communicate via a modem or other communications device, thus
minimizing the labor intensity of system monitoring. Additional proposed
products may be developed to enhance the on-line system (i.e., fault severity
assessment). A major design feature of one of the proposed failure diagnostic
and condition monitoring systems is to use multiple piezo ceramic detectors to
triangulate the location of the source of the problem. The system is also being
designed to operate either as a stand-alone system or in combination with a
transformer quieting system, which may enable the sharing of certain hardware
components. The Company believes that availability of such a combined system may
enhance the customer's perceived value of the Company's products, thereby
facilitating sales. The Company has filed patent applications in connection with
the failure diagnostic and condition monitoring technology in the United States,
Canada and other countries. See "Risk Factors--Dependence on Patents; Uncertain
Proprietary Protection" and "Patent Protection." There can be no assurance that
the Company will be successful in its attempt to develop or commercialize any of
the proposed failure diagnostic and condition monitoring systems.
ACTIVE MAGNETIC FIELD CONTROL AND CANCELLATION SYSTEMS
The Company is presently investigating two proposed applications for active
magnetic field control and cancellation technology using active control
algorithms. The cores of substation transformers produce strong magnetic fields
in the process of stepping voltage up or down. Other parts of the transformer,
particularly exposed metal surfaces that are attractive to magnetic fields,
cause part of the field to stray away from the core. Whenever stray magnetic
fields are lost, the transformer's efficiency is decreased. Current mitigation
procedures involve heavy passive shielding which due to its size, weight and
cost is impractical for use in larger transformers. The Company is currently
developing an active magnetic field control product that will contain magnetic
fields and prevent them from straying from the core, using algorithms that
evaluate and send controlling signals to magnetic transducers. This will enable
Power Industry customers to use a smaller, lighter (and hence less expensive)
and more efficient transformer.
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The Company also intends to pursue a separate active magnetic field
cancellation system that would confine and/or cancel magnetic fields coming from
substation yards and indoor transformer vaults. With computer monitors and other
electrical equipment becoming increasingly commonplace, high levels of magnetic
fields in residential and commercial spaces are a growing problem because of the
adverse effect of magnetic fields on these sensitive devices. Additionally,
there is a perceived risk of health problems from continuous exposure to high
magnetic field levels. Although scientific studies investigating a connection
between high magnetic field levels and adverse health effects are inconclusive,
it is nevertheless an issue of public concern. The active magnetic field
cancellation products under development by the Company would use active control
algorithms to drive a multi-channel magnetic field control or cancellation
system to cancel magnetic fields emanating from substations. The Company
believes that this multi-channel device will provide a greater level of control
over magnetic fields than can be achieved by other techniques such as passive
shielding or reconfiguration of the substation. In addition, the Company
believes that the active magnetic field cancellation will also be cost-effective
and cause less disruption to substation operations during installation than
these other techniques.
The Company is currently in discussions with companies to enter into joint
development and marketing arrangements in both the United States and Europe with
respect to these proposed products. The Company also intends to pursue all
available intellectual property protection for its proposed active magnetic
field control and cancellation systems. See "Risk Factors--Dependence on
Patents; Uncertain Proprietary Protection" and "Patent Protection." There can be
no assurance that the Company will be successful in its attempt to develop or
commercialize an active magnetic field control or cancellation product.
ADDITIONAL POTENTIAL ACTIVE NOISE CONTROL PRODUCTS
In 1995, the Company chose to narrow the focus of its development efforts to
those applications that the Company believed would have the largest market
potential in the shortest period of time. Accordingly, the Company halted plans
for the development of three additional projects which use the basic active
noise and vibration control technology. Although the Company does not intend to
devote additional development efforts in connection with these products in the
near-term, the Company believes that they may be further developed in the
future.
SILENCERS FOR INTERNAL COMBUSTION POWER GENERATORS ("GENSET
SILENCERS"). Internal combustion generators ("Gensets") are used to augment a
utility's base generation capacity. Typically, Gensets are employed at remote
and rural locations as a cost-effective means of increasing available
electricity. Gensets are driven by large diesel engines and have capacities
ranging from 100 kilowatts to over 10 megawatts. Using traditional passive means
of quieting, Gensets can still produce a significant amount of noise (in excess
of 100 dB). Prototype Genset Silencers were installed by the Company from July
through September 1993, on Gensets located at God's Lake Narrows for Manitoba
Hydro and on the Queen Charlotte Islands for British Columbia Hydro. The active
noise and vibration control technology is used to track changes in noise
amplitude and frequency which allows the Genset Silencers to respond almost
instantaneously. Installation of the Genset Silencer also increases fuel
efficiency by eliminating back pressure in the muffler system.
FORCED DRAFT/INDUCED DRAFT ("FD/ID") FAN QUIETING. Thermoelectric
generation sites use large draft fans as part of the ventilation system for
their boiler units. In August 1994, NCT acquired Active Noise and Vibration
Technologies, Inc. ("ANVT"), a co-licensee of the FD/ID fan quieting technology,
which addresses the noise produced by the fans. These are tonal noises related
to the blade rotation frequency of the fan, and atonal noises related to air
turbulence. The tonal cancellation system uses speakers to serve as actuators
mounted both inside and outside a tubular duct, or manifold, installed to
support the speakers and which functions to improve airflow at the intake. The
improved air flow created by this manifold (or flow improvement device) improves
its energy efficiency and performance.
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Prototype FD/ID fan quieting systems were installed by a joint venture
partner of ANVT at two generating facilities of Southern California Edison, the
Coolwater Generating Station in Barstow, California in February 1992, and the
Redondo Beach Generating Station in Redondo Beach, California in February 1993.
Tonal reductions have approached 18dB and atonal reductions have approached 12dB
at Coolwater. In addition, actual measurements have shown that the flow
improvement device has improved energy efficiency by 5% to 6.5% at both
locations. QuietPower is in negotiations with the parties involved in these
projects to manage further development and marketing of the FD/ID fan quieting
system.
GAS AND STEAM TURBINE QUIETING. Gas and steam turbines produce both high
and low frequency tonal and broadband noise. Silencing is required for both
intake and exhaust ports. Based upon the Company's prior experience with Genset
Silencers and FD/ID fan quieting systems, the Company believes that it can
develop a digitally based multi-channel control system using a modified active
noise and vibration control algorithm that will quiet both broadband and tonal
noise.
CONTRACTUAL AGREEMENTS WITH NCT
The Company's contractual relationships with NCT cover all proprietary
active noise and vibration control technology and products owned by NCT relating
to the Power Industry and to all other products, technologies and territories
not otherwise covered under exclusive arrangements between NCT and other third
parties. See "Risk Factors--Dependence on NCT."
On March 27, 1995, the Company signed a Master Agreement (which was
subsequently amended on March 28, 1995, April 21, 1995, May 21, 1996 and April
9, 1997) (the "NCT Master Agreement") with NCT. The NCT Master Agreement
provides the Company with world-wide exclusive rights to manufacture, market,
sell and distribute transformer quieting systems, and all future products or
applications related to the Power Industry, where the Company chooses to fund
development costs. In addition, the NCT Master Agreement grants the Company an
exclusive world-wide license in connection with active steam and gas turbine
quieting products. See "Additional Potential Active Noise Control Products--Gas
and steam turbine quieting." The NCT Master Agreement terminates upon the
expiration of NCT's rights in the intellectual property that is being licensed.
For these rights, the Company has agreed to pay a non-refundable $750,000
license fee, $250,000 of which has been credited from a payment made in June
1994 under a prior agreement between the Company and NCT, $250,000 of which was
deemed paid upon QuietPower's return to NCT in April 1995 of warrants to
purchase 750,000 shares of NCT's common stock and the remainder of which has
been split into 30 equal monthly installment payments of $8,333 which commenced
in July 1995. To obtain the exclusive world-wide rights to products and
applications both currently specified and to be identified in the future, the
Company has also agreed to fund commercialization costs for such products and
applications. After QuietPower has recouped 150% of its development costs, NCT
shall receive from pre-tax profits a royalty of 9% on the first $6,000,000 of
QuietPower's sales of exclusively licensed products (50% for technology
sublicenses), and 6% of all sales thereafter. In the April 9, 1997 amendment to
the NCT Master Agreement, the Company and NCT agreed that in order to allow the
Company to maintain its license, the Company would make two payments that were
owing to NCT and related to past engineering services for active quieting system
development and for headset purchases (and unrelated to the $750,000 license
fee). The first payment of $136,000 was made April 18, 1997. A final installment
of $200,000 is payable within thirty days following the closing of this
Offering. The Company intends to utilize a portion of the net proceeds of this
Offering to make such payment. See "Use of Proceeds."
The Company has the right in all instances to manufacture licensed products
or sublicense manufacturing to a third party. Under the NCT Master Agreement,
NCT has agreed to supply QuietPower with all available components at the most
favorable price available to other customers purchasing similar quantities.
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With respect to the marketing and distribution of the Headsets, the
Distributor Agreement provides the Company with non-exclusive distribution
rights on the same terms established from time to time by NCT with its stocking
distributors. Under this agreement, the Company purchases a product at a
discount and resells it into the marketplace. This Distributor Agreement
automatically renews each year unless one party notifies the other that it
desires to terminate the Distributor Agreement, at least 90 days prior to the
end of such year.
JOINT VENTURE AGREEMENTS
GE JOINT VENTURE
On November 13, 1996 the Company entered into the ten-year GE JV Agreement
with Prolec-GE, a joint venture between GE and Prolec S.A. de C.V., a
wholly-owned subsidiary of Industrias AXA, S.A. de C.V. Prolec-GE is one of the
largest manufacturers of distribution transformers in the world and also
manufactures and sells other power distribution equipment. The GE JV Agreement
was executed as a result of a year-long feasibility study of the failure
diagnostic and condition monitoring technology by GE's Power Transformer
Division and Baltimore Gas & Electric Company. Upon the successful funding and
development of each proposed product, under the GE JV Agreement, the Company
will grant an exclusive license to the joint venture for both the sale of the
proposed failure diagnostic and condition monitoring systems for newly
manufactured transformers or other substation equipment, including circuit
breakers, load tap changers and high voltage instrument transformers, as well as
for retrofit installations on previously installed transformers or other
substation equipment. It is anticipated that the joint venture will develop,
commercialize, market and install the Company's proposed failure diagnostic and
condition monitoring products world-wide. The GE JV Agreement provides for sole
ownership of all of the failure diagnostic and condition monitoring technology
by QuietPower. Earnings from the joint venture will be shared equally between
QuietPower and Prolec-GE, and each party is obligated, upon approval of each new
project by the parties, to contribute such personnel and resources as shall have
been approved in connection with such project.
ABB JOINT VENTURE
On June 15, 1996 the Company entered into the five-year ABB JV Agreement
with ABB Secheron S.A., an indirect wholly owned subsidiary of ABB. ABB, a
multi-national conglomerate based in Zurich, Switzerland, is, among other
things, one of the world's largest manufacturers of power transformers. Pursuant
to the ABB JV Agreement, the Company is obligated to grant an exclusive license
to ABB Secheron S.A. to retrofit existing European transformers with transformer
quieting systems, and a right of first refusal to ABB Secheron S.A., for
integration of the transformer quieting systems into new transformers. All
revenues generated from the exclusive license are required to be distributed to
the joint venture. It is anticipated that the joint venture will adapt the
transformer quieting systems for use with standard European operation and
design, as well as market and install the transformer quieting systems. The ABB
JV Agreement provides for the sole ownership of the active noise and vibration
control technology by QuietPower. Earnings from the joint venture will be shared
equally between QuietPower and ABB Secheron S.A., and each party is obligated,
upon approval by the parties of a product improvement program, to contribute
such personnel and resources to a project as shall have been approved in
connection with such project.
UTILITY FUNDED DEVELOPMENT PROJECTS
QuietPower has developed applications for the active noise and vibration
control technology with the assistance of companies within the Power Industry at
all stages of commercialization, in some cases through the direct funding of
research and development or product reliability and optimization testing. In
general, with respect to these projects, QuietPower provided engineering
expertise and services, NCT
41
<PAGE>
provided engineering expertise and services and relevant technology rights and
the utilities provided funding and specifications as to utility requirements.
Return on investment for some of the participating utilities for this funding
will include purchase incentives (purchase discounts) and royalties on future
commercialized product sales. The Company believes that participating utilities
have a vested interest in the success of introducing noise reduction products
and may therefore provide the Company with marketing support of these products.
The following table lists utility investments to fund research and
development projects that were received through December 31, 1995. QuietPower
initiated these projects as the first step leading to product commercialization.
These projects provided significant financial resources for product development,
provided utility input for market validation and product definition and laid the
foundation for selling commercial/industrial products and systems. The Company
recognized cumulative revenues of approximately $1.37 million for these
development contracts. Subsequent to December 31, 1995, the Company did not
engage in any utility funded development projects in view of its transition in
focus to commercial introduction of product. QuietPower may in the future
determine to engage in additional such projects. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
TABLE 1
UTILITY INVESTMENTS IN QUIETPOWER TECHNOLOGY DEVELOPMENT
<TABLE>
<CAPTION>
UTILITY APPLICATION FUNDING
- ------------------------------------------------- ------------------------------------------------- ------------
<S> <C> <C>
Baltimore Gas & Electric Company Transformer quieting $ 319,000
Baltimore Gas & Electric Company and General
Electric Company Failure diagnostic condition monitoring 184,000
British Columbia Hydro and Power Authority Generator silencers 24,000
British Columbia Hydro and Power Authority Transformer quieting 28,000
Brooklyn Union Gas Company Gas combustion quieting 103,000
Canadian Electrical Association/Asea Brown
Boveri/Manitoba Hydro Transformer quieting 61,000
Commonwealth Edison Transformer quieting 180,000
Jersey Central Power & Light Transformer quieting 156,000
Manitoba Hydro Transformer quieting 161,000
Manitoba Hydro Power plant headsets 120,000
Manitoba Hydro Generator silencers 37,000
------------
TOTAL PROJECTS...................................................................................... $ 1,373,000
------------
------------
</TABLE>
The Baltimore Gas and Electric Company and Manitoba Hydro, together with the
other utilities listed below, were engaged in the development of a prototype
transformer quieting system. QuietPower and NCT were responsible for project
management and engineering. As an inducement to join, most group participants
are to receive a return on funds invested based on a 3% royalty of future
products sold, and 5% purchase discounts, which, when combined, may provide a
return of up to 150% of the amount invested by the utility. Pursuant to an
agreement dated June 13, 1997, Baltimore Gas and Electric Company has converted
its rights to receive royalties and purchase discounts into 80,000 shares of
Common Stock. Results of the Company's and NCT's prototype development projects
indicated that transformer quieting systems produced significant cancellation of
noise. The Company is continuing development efforts, independent of funded
projects, to lower the cost of the system components and installation of its
initial commercial transformer quieting product, the ATQ-100. See "Risk Factors
- -Limited Sales History; Need for Cost Reduction of ATQ-100 and Modification of
Headsets; Substantial
42
<PAGE>
Time Lapse Until Additional Commercial Product Introduction" and "Active Noise
Control Technology and Products--Transformer Noise Quieting."
The following is a summary of the prototype transformer quieting systems
installed by the Company:
TABLE 2
PROTOTYPE TRANSFORMER QUIETING SYSTEMS
<TABLE>
<CAPTION>
FUNDING
UTILITY LOCATION INSTALLED RECEIVED(1)
- ---------------------------------------------------- ----------------------- ------------------ -------------
<S> <C> <C> <C>
Manitoba Hydro Winnipeg, Manitoba, September 1993 $ 161,000
Canada
Baltimore Gas and Electric Company Annapolis, MD October 1993 163,000
Baltimore Gas and Electric Company Linthicum, MD August 1994 156,000
Jersey Central Power and Light Matawan, NJ October 1994 156,000
Commonwealth Edison Rockford, IL August 1995 180,000
-------------
TOTAL FUNDING.................................................................................... $ 816,000
-------------
-------------
</TABLE>
- ------------------------
(1) Funding amounts received are also included in Table 1.
PATENT PROTECTION
The Company's rights to the active noise and vibration control technology
derive from NCT's patent position. According to publicly available information,
as of December 31, 1996, NCT held or had rights to 231 patents, including 86
United States patents and over 165 corresponding foreign patents relating to the
active noise and vibration control technology. Additionally, as of December 31,
1996, NCT had 204 patent applications pending in the United States and Europe.
See "Contractual Agreements with NCT."
With respect to its failure diagnostic and condition monitoring technology,
the Company has filed patent applications in the United States and pursuant to
the Patent Cooperation Treaty in Canada and other countries. The failure
diagnostic and condition monitoring patents, if issued, are expected to be owned
by QuietPower and licensed to the joint venture between the Company and
Prolec-GE. Such license shall be exclusive, provided that the joint venture
first successfully funds and develops the technology. The Company is currently
preparing a patent application with respect to the active magnetic field
cancellation technology.
There can be no assurance that patents will issue from any of the Company's
patent applications, or that the Company will develop additional products that
are patentable. No assurance can be given as to the range or degree of
protection any patents issued to the Company or licensed from NCT will afford or
that such patents or licenses will provide protection that have commercial
significance or will provide competitive advantages for the Company's products.
With respect to the patents owned by, or licensed to NCT, NCT has indicated to
the Company that it has conducted only limited patent searches and no assurances
can be given by the Company that patents do not exist or will not be issued in
the future that would have an adverse effect on the Company's ability to market
its products or maintain its competitive position with respect to its products.
In the event NCT chooses not to defend against its patent rights, substantial
resources may be required to obtain and defend patent and other rights to
protect present and future technology and other property of the Company. See
"Risk Factors--Dependence on Patents; Uncertain Proprietary Protection."
MANUFACTURING
Currently, the Company uses several manufacturing sources for the components
of its ATQ-100 transformer quieting systems. Some of these sources may have
difficulty delivering large quantities in a
43
<PAGE>
timely manner. Therefore, alternative sources may need to be found in the event
sales volume for the transformer quieting systems significantly increases (of
which there can be no assurance). Headsets are currently manufactured by NCT and
the Company purchases them on a distribution basis. See "Contractual Agreements
with NCT." The Company does not currently intend to undertake the manufacture of
any products which may derive from the active noise and vibration control
technology. To the extent that the Company does not utilize joint venture
partners to manufacture proposed products, the Company may be required to enter
into arrangements with third parties to undertake these operations. To the
extent that other parties are manufacturing products for the Company, the
Company will have less control over the quality of products and timeliness of
delivery than if manufactured by the Company. See "Risk Factors-- Dependence on
Joint Venture Partners" and "Risk Factors--No Manufacturing Facilities or
Personnel."
GOVERNMENTAL REGULATION
Potential customers of the Company are governed by regulations specifying
permissible noise limits. The regulations governing permitted noise levels are
customarily instituted on a state, county or local level and therefore vary
significantly across the United States and Canada. In general, these regulations
regulate noise levels regardless of source, and do not specifically address
noise produced by utilities. In addition, each regulation may vary in the method
it uses to record noise level; some statutes will only regulate certain
frequencies; some will regulate the overall noise that can be registered in a
given period of time; some will vary permitted noise levels at different times
of day; and some will vary permitted noise levels depending on the use of
neighboring properties (e.g., schools). The Company does not anticipate that
increased stringency in these local ordinances will impose any additional
hurdles for the Company. Rather, the Company believes that these regulations and
any modifications thereto may provide the Power Industry with further incentives
to consider using QuietPower's quieting products. However, there can be no
assurance that such regulations, if any, will be enforced or that they will not
be eliminated.
COMPETITION
NOISE CONTROL
QuietPower is not aware of any company, other than QuietPower and NCT, that
is now developing and/or commercializing active noise control products for the
Power Industry. Potential and existing competition with respect to these
products and systems comes from companies developing their own active noise
reduction systems (direct competition) and companies that use traditional
passive means, such as barrier walls, for noise quieting (indirect). The Company
believes that it has several advantages over both types of competitors.
QuietPower's technology partner, NCT, has developed a wide range of active noise
reduction technologies with applications in a number of noise problem
environments. The Company believes that the effectiveness of these technologies
will give its products performance, functionality and flexibility advantages
over those of its indirect competitors. Although the Company believes that the
initial sales price of the ATQ-100 transformer quieting system has impeded
acceptance of the product, the Company believes that the recent price reduction
of the system in conjunction with its continuing cost reduction efforts will
accelerate market acceptance. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The Company
believes that active noise and vibration control technology has several
advantages over indirect competition, most notably in quieting low frequency
tonal noise, which the Company believes cannot be done as effectively with
traditional passive means.
There are a limited number of active noise reduction companies which
currently compete outside of the Power Industry. These companies include
Digisonix, a division of Nelson Industries, Inc., Group Lotus PLC, Toshiba
Corporation and Hitachi, Ltd. The Company knows of four companies that sell
active headset products primarily for the aviation market; Bose Corporation,
David Clark Company Inc., Telex Communications, Inc. and Sennheiser Electronic
Corp. To date these companies have not competed with
44
<PAGE>
the Company in any of its identified markets, with the exception of David Clark
Company Inc., which has been marketing, primarily its passive headsets, to the
railroad industry. Many of these companies, as well as the Company's potential
competitors, could enter the active noise and vibration attenuation field as the
industry develops.
FAILURE DIAGNOSTICS
While there are several companies that offer transformer diagnostic
products, the Company believes that its failure diagnostic and condition
monitoring system has advantages over other systems that detect partial
discharge (a degradation of the transformer's insulation). To the best of the
Company's knowledge, there are no other products that combine a continuously
monitoring, non-invasive (where the transformer does not have to be taken
off-line) means of detecting partial discharge with the ability to locate the
source of the partial discharge.
MAGNETIC FIELD CANCELLATION
The Company is not aware of any commercial products available for the
control of magnetic fields inside a transformer. Typical mitigation procedures
for stray magnetic field losses inside the transformer involve heavy metal
shielding installed by the transformer manufacturer. Although there are a few
magnetic field mitigation products on the market for use in the substation, they
employ passive shielding, or a simple, single channel control loop, and
typically must be implemented by a professional as part of a larger mitigation
procedure to achieve desired reductions. To the Company's knowledge, no one else
has employed the multi-channel, adaptive controller to magnetic field
cancellation in either the transformer or substation.
The Company intends to compete in each of these areas on the basis of its
own inventions and intellectual property and its license to NCT's patented
technology, the expertise of its personnel and their knowledge of and access to
the Power Industry, and its comparatively early entry into the market. Current
and potential competitors in the noise control, failure diagnostics and magnetic
field cancellation areas may have substantially greater management, technical,
financial, marketing and product development resources than the Company.
EMPLOYEES
The Company employs eleven persons on a full-time basis, including three who
are executive officers, four who are engineers, two who are engaged in marketing
and two who are engaged solely in administration. Additionally, two executive
officers perform a variety of technical and marketing oriented functions. The
Company has no collective bargaining agreements and no employee is represented
by a labor union. The Company has never had a work stoppage and considers its
relationship with its employees to be satisfactory.
The Company's success depends to a significant extent upon a number of key
management and technical employees. The loss of services of one or several of
these key employees could have a material adverse effect on the Company. While
the Company has employment agreements with each of its three executive officers,
none of the Company's other technical and managerial employees is bound by an
employment agreement other than with respect to confidentiality and patent
assignment agreements. Management believes that the future success of the
Company will also depend in large part upon the Company's ability to attract and
retain highly-skilled technical, managerial and marketing personnel. The Company
competes for such personnel with other companies, academic institutions,
governmental entities and other organizations, some of which may have
substantially greater capital resources than the Company. There can be no
assurance that management will be successful in attracting and retaining the
personnel it requires to grow and operate profitably. See "Risk
Factors--Dependence on Key Personnel."
45
<PAGE>
FACILITIES
The Company's principal administrative, sales and marketing, product
development and support facilities are currently located in New York, New York,
and comprise approximately 15,000 square feet. The Company occupies these
premises pursuant to a ten-year lease, expiring May 15, 2007. The fixed rental
for this space is approximately $13,125 per month, plus operating expenses. In
support of its joint venture with ABB Secheron S.A., the Company is subleasing
approximately 700 square feet for 18 months from Genevest Consulting Group, in
Geneva, Switzerland, for approximately $1,500 per month, plus operating
expenses. See "Joint Venture Agreements--ABB Joint Venture."
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or its
properties is subject.
46
<PAGE>
MANAGEMENT
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------------ ----------- -------------------------------------------------------------------
<S> <C> <C>
Jonathan M. Charry, Ph.D............ 48 Chairman of the Board, President and Chief Executive Officer
Mark J. Dietrich.................... 38 Vice President--Strategic Marketing
Eric W. Jacobson.................... 42 Vice President, Chief Financial Officer, Secretary and Director
William S. Bernstein, Esq.(1)(2).... 40 Director
S. Carl Horn af Rantzien(1)(2)...... 50 Director
Alfred B. Thacher, Jr.(1)(2)........ 51 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
JONATHAN M. CHARRY, PH.D. has been Chairman of the Board, President and
Chief Executive Officer of the Company since inception. Since 1985, Dr. Charry
has been President and Chief Executive Officer of Environmental Research
Information, Inc. ("ERI"), an environmental engineering consulting firm which
has been operationally inactive since 1992. ERI specialized in consulting to the
utility industry and in environmental impact assessment and risk analysis for
electric power generation, transmission and distribution systems. From 1979 to
1984, he held appointments as Senior Research Scientist in the Laboratory of
Neuropharmacology and Environmental Toxicology at the New York State Institute
for Basic Research and as Assistant Professor at The Rockefeller University.
From 1977 to 1979, Dr. Charry was a Rockefeller Foundation Fellow in
Environmental Affairs at The Rockefeller University, at which time he was a
principal investigator on research grants and contracts from the National
Institutes of Health and the Electric Power Research Institute. For the past ten
years, he has been actively engaged in evaluating environmental issues for the
energy industry. Dr. Charry is past President and Director of the American
Institute of Medical Climatology, and past Chairman of the Section on Air and
Other Environmental Ion Technology of the American Society of Testing and
Materials. He received a Ph.D. from New York University and an A.B. from Tufts
University.
MARK J. DIETRICH has been the Vice President--Strategic Marketing of the
Company since April 1994. From 1988 to 1994, Mr. Dietrich was Vice President and
National Sales Manager for COS Computer Systems Inc., which specializes in the
leasing and trading of large computer and high-technology equipment. From 1988
to 1990, he was Vice President of Equipment Finance for COS Computer Systems
Inc. Mr. Dietrich graduated from Vanderbilt University School of Engineering,
with a B.E.E. in electrical engineering, mathematics and computer science.
ERIC W. JACOBSON has been Vice President, Chief Financial Officer, Secretary
and a director of the Company since inception. Mr. Jacobson has also been Vice
President and Chief Financial Officer of ERI since 1992. From 1987 to 1989, Mr.
Jacobson was Vice President--Finance and Chief Financial Officer for SmartCard
International, Inc., a publicly traded technology company involved with the
technological and market development of smart card (computer in a card) systems.
Mr. Jacobson is a certified public accountant licensed in New York State. Mr.
Jacobson received his bachelors degree from the University of Montana.
WILLIAM S. BERNSTEIN, ESQ. has been a director of the Company since
incorporation. Mr. Bernstein serves as Co-Chairman of the Board and Co-Chief
Executive Officer of Telesis Medical Management, a New York based physician
management company. Mr. Bernstein is a principal of Sterling Health Capital
Management, a consulting firm that manages project financing for hospitals and
other health care facilities
47
<PAGE>
and a founding partner of Kalkines, Arky, Zall & Bernstein, a New York based law
firm. He has also served as Special Assistant to the Executive Secretary of the
Department of Health Education & Welfare, as law clerk to the Honorable Raymond
J. Pettine, United States District Judge for the District of Rhode Island, and
as health care Counsel to the New York City Council President. Mr. Bernstein
received his Bachelors and Masters degrees from Brown University and received
his law degree from New York University School of Law.
S. CARL HORN AF RANTZIEN has been a director of the Company since December
1996. Since 1996, Mr. Horn has been a principal of Horn Konsult/Eapecs, a
Stockholm based private equity management and consulting syndicate. Since 1984,
Mr. Horn has also been a limited partner of Ventana Growth Funds, a venture
capital company, and the principal of Horn Konsult AB, a Stockholm based
investment banking and fund management company. Mr. Horn received his bachelors
degree from Morby College in Sweden.
ALFRED B. THACHER, JR. has been a director of the Company since December
1996. Since December 1993, Mr. Thacher has been a principal of Thacher Vendig &
Company, Inc., a New York based investment banking and corporate development
firm. Between 1991 and 1993, he was a principal of Mitchell & Associates, a
banking house specializing in mergers and acquisitions and advising work in the
industrial market. From 1987 to 1991, Mr. Thacher was a Managing Director at
Bear Stearns in the corporate finance and mortgage finance departments. Mr.
Thacher received his Bachelors degree from Yale University and his Masters of
Business Administration from the Wharton School.
No family relationship exists between any director or executive officer and
any other director or executive officer.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee and an Audit
Committee.
COMPENSATION COMMITTEE. The Compensation Committee has the responsibility
for reviewing the performance of the officers of the Company and recommending to
the Board of Directors of the Company salary and bonus amounts for all officers
of the Company, subject to the terms of existing employment agreements. The
Compensation Committee also has the responsibility for oversight and
administration of the Company's 1993 Stock Option Plan. The Compensation
Committee consists of Messrs. Bernstein, Horn and Thacher.
AUDIT COMMITTEE. The Audit Committee has the responsibility for reviewing
and supervising the financial controls of the Company. The Audit Committee makes
recommendations to the Board of Directors of the Company with respect to the
Company's financial statements and the appointment of independent auditors,
reviews significant audit and accounting policies and practices, meets with the
Company's independent public accountants concerning, among other things, the
scope of audits and reports, and reviews the performance of overall accounting
and financial controls of the Company. The Audit Committee consists of Messrs.
Bernstein, Horn and Thacher.
48
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation
of each of the named executive officers for services provided in all capacities
to the Company in the years ended December 31, 1996, 1995 and 1994. No other
executive officer of the Company received compensation in excess of $100,000
during the year ended December 31, 1996. For the purposes of this table,
warrants are deemed to be equivalent to stock options.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
---------------------- OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) (#)
- ------------------------------------------------------------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Jonathan M. Charry,............................................... 1996 $ 157,500(1) -- 135,000
Chief Executive Officer and President 1995 $ 132,917(1) -- 100,000
1994 $ 145,000 $ 100,000(2) 10,260
Eric W. Jacobson,................................................. 1996 $ 110,000(1) -- 60,000
Vice President and Chief Financial Officer 1995 $ 90,000 -- 15,000
1994 $ 90,000 -- 5,130
</TABLE>
- ------------------------
(1) Both Dr. Charry and Mr. Jacobson agreed to accept reduced salary payments
for these years.
(2) Granted pursuant to previous employment agreement.
OPTION GRANTS IN 1996
The following table sets forth certain information for each of the named
executive officers with respect to grants of options to purchase Common Stock of
the Company made during the year ended December 31, 1996. For the purposes of
this table, warrants are deemed to be equivalent to stock options.
<TABLE>
<CAPTION>
NO. OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED(#) IN YEAR ($/SH) DATE
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Jonathan M. Charry....................................................... 100,000 33.6% 2.50 4/1/06
35,000 11.7% 2.50 12/2/06
Eric W. Jacobson......................................................... 25,000 8.4% 2.50 4/1/06
35,000 11.7% 2.50 12/2/06
</TABLE>
49
<PAGE>
AGGREGATED OPTION EXERCISES DURING 1996 AND YEAR END OPTION VALUES
The following table sets forth certain information for each of the named
executive officers with respect to the exercise of options to purchase Common
Stock during 1996 and the number and value of securities underlying unexercised
options held by the named executive officers as of December 31, 1996. The
Company does not have any outstanding stock appreciation rights. For the
purposes of this table, warrants are deemed to be equivalent to stock options.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS
SHARES VALUE OPTIONS AT YEAR END(#) AT YEAR END($)(1)
ACQUIRED ON REALIZED -------------------------- -----------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------------- ----------------- --------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Jonathan M. Charry......................... 0 0 30,130 215,130 0
Eric W. Jacobson........................... 0 0 6,315 73,815 0
<CAPTION>
NAME UNEXERCISABLE
- ------------------------------------------- -------------
<S> <C>
Jonathan M. Charry......................... 167,400
Eric W. Jacobson........................... 74,400
</TABLE>
- ------------------------
(1) Calculated by determining the difference between the estimated fair market
value of the Company's Common Stock as of December 31, 1996 ($3.74 per
share) and the exercise price for the securities underlying the options.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with the named executive officers
shown on the compensation table above. The employment agreement with Dr.
Jonathan M. Charry, the Chairman of the Board, President and Chief Executive
Officer of the Company, is dated as of March 9, 1995, terminates on March 8,
1998 and obligates the Company to pay Dr. Charry a yearly base salary of
$195,000 per year, subject to a yearly increase based on the Consumer Price
Index. Dr. Charry agreed to accept reduced salary payments for 1995 and 1996.
The employment agreement with Mr. Eric W. Jacobson, the Vice President, Chief
Financial Officer and Secretary of the Company is dated as of January 1, 1996,
terminates on December 31, 1998 and obligates the Company to pay Mr. Jacobson a
yearly base salary of $150,000 per year, subject to a yearly increase based on
the Consumer Price Index. Mr. Jacobson agreed to accept reduced salary payments
for 1996. Included in both agreements are i) provisions that the officers are
not to compete with the Company for 12 months after termination of their
respective agreements, ii) confidentiality provisions, and iii) entitlement for
additional increases to base salary, or bonuses, at the discretion of the
Compensation Committee of the Board of Directors.
STOCK OPTION PLAN
The Company's 1993 Stock Option Plan (the "1993 Plan") was adopted to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees and consultants of
the Company, and to promote the success of the Company's business. Options
granted under the 1993 Plan may be either incentive stock options, as defined in
Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified
stock options. The Company has reserved 250,000 shares of Common Stock for
issuance under the 1993 Plan. As of December 31, 1996, options to purchase an
aggregate of 239,490 shares were outstanding under the 1993 Plan at a weighted
average exercise price of $4.22, of which options to purchase an aggregate of
110,235 shares were then exercisable at a weighted average exercise price of
$4.07.
The 1993 Plan may be administered by the Board of Directors or a committee
of the Board. The 1993 Plan is currently administered by the Compensation
Committee of the Board. The entity administering the 1993 Plan has the power to
determine the terms of any options granted thereunder, including the exercise
price, the number of shares subject to the option, and the exercisability
thereof. Options granted under the 1993 Plan are generally not transferable, and
each option is exercisable during the lifetime of the optionee only by such
optionee. The exercise price of all incentive stock options granted under the
1993 Plan must
50
<PAGE>
be at least equal to the fair market value of the shares of Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of stock of the Company, the
exercise price of any stock option granted must be equal at least 110% of the
fair market value on the grant date and the maximum term of the option must not
exceed five years. The term of all other options under the 1993 Plan may not
exceed ten years. The specific terms of each option grant are approved by the
Board of Directors and are reflected in a written stock option agreement.
401(K) PLAN
The Company has a retirement savings plan for eligible full-time employees
pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. At
its discretion, the Company may make contributions up to 15% of plan
participants' compensation. The Company made no contributions to the plan for
the years ended December 31, 1995 and December 31, 1996.
COMPENSATION OF DIRECTORS
The directors of the Company do not receive cash compensation, however, the
1993 Plan allows the Company to grant options to all directors of the Company.
On December 2, 1996, the Compensation Committee granted to each of Alfred B.
Thacher, Jr. and S. Carl Horn af Rantzien, ten year warrants to purchase 10,000
shares of Common Stock at an exercise price of $.10 per share, and to each of
Jonathan M. Charry, Eric W. Jacobson and William S. Bernstein, ten year warrants
to purchase 10,000 shares of Common Stock at an exercise price of $2.50 per
share.
KEY PERSON LIFE INSURANCE
The Company is the sole beneficiary of a $1 million term life insurance
policy covering Dr. Charry.
INDEMNIFICATION OF DIRECTORS
The Company's Certificate of Incorporation: (i) eliminates the liability of
the directors of the Company for monetary damages to the fullest extent
permitted by Delaware law and (ii) authorizes the Company to indemnify its
officers and directors to the fullest extent permitted by Delaware law. The By-
Laws of the Company provide broad indemnification for officers and directors
against expenses (including legal fees and judgments) incurred in connection
with any civil or criminal action which arises from the performance of duties
for the Company. The By-Laws of the Company also provide that the Company will
indemnify such persons to the fullest extent permitted by law. The
indemnification provided by the By-Laws applies to any action taken by the
indemnitee while serving as an officer or director of the Company, any of its
subsidiaries (none presently) or at the Company's request as a director,
officer, employee or agent of any of the above. The By-Laws of the Company do
not provide indemnification for any acts or omissions from which a director may
not be relieved of liability under the Delaware Law.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, certain information as of April 30, 1997,
regarding beneficial ownership of the Company's Common Stock by (i) each
stockholder known by the Company to be the beneficial owner of 5% or more of the
outstanding shares of Common Stock; (ii) each director of the Company; (iii)
each person named in the Summary Compensation Table above; and (iv) all of the
Company's current officers and directors as a group. Except as otherwise
indicated, the Company believes that the beneficial owners of the securities
listed below have sole investment and voting power with respect to such
securities, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
BENEFICIALLY OWNED
----------------------------------
<S> <C> <C> <C>
NUMBER OF SHARES OF
COMMON STOCK
NAME AND ADDRESS OF BENEFICIALLY
BENEFICIAL HOLDER OWNED(1) BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------------ -------------------- ----------------- ---------------
Jonathan M. Charry
460 West 34th Street
New York, New York 10001.................................... 305,077(2) 22.8% 9.1%
Eric W. Jacobson
460 West 34th Street
New York, New York 10001.................................... 39,598(3) 3.6% 1.3%
William S. Bernstein
460 West 34th Street
New York, New York 10001.................................... 38,678(4) 3.5% 1.2%
S. Carl Horn af Rantzien
460 West 34th Street
New York, New York 10001.................................... 0 0 0
Alfred B. Thacher, Jr.
460 West 34th Street
New York, New York 10001.................................... 60,000(5) 5.2% 1.9%
Nordiska Fondkomission
Stureplan 19
Box 7362 S-103
90 Stockholm Sweden......................................... 166,427(6) 14.2% 5.2%
B. Michael Pisani
44 Lake Road
Short Hills, New Jersey 07078............................... 95,000(7) 8.3% 3.0%
DayStar Partners, L.P.
10600 N. DeAnza Boulevard, Suite 215
Cupertino, California 95014................................. 137,500(8) 11.3% 4.3%
QPS Bridge, LLC
1330 Avenue of the Americas 36th floor
New York, New York 10019.................................... 90,000(9) 7.7% 2.8%
Regent Capital Partners, L.P.
505 Park Avenue 17th floor
New York, New York 10022.................................... 120,000(10) 10.0% 3.7%
Baltimore Gas and Electric Company
39 West Lexington Street
Baltimore, Maryland 21203................................... 80,000 7.4% 2.6%
Environmental Research Information, Inc.
460 West 34th Street
New York, New York 10001(11)................................ 168,500 13.5% 5.2%
All officers and directors as a group (6 persons)........... 462,103(12) 32.0% 13.4%
</TABLE>
52
<PAGE>
- ------------------------
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person upon the exercise of options or warrants within 60
days. Each beneficial owner's percentage ownership is determined by assuming
that options or warrants exercisable within 60 days that are held by such
person (but not those held by any other person) have been exercised.
(2) Includes 57,695 shares of Common Stock underlying options exercisable within
60 days and 25,000 shares of Common Stock underlying warrants exercisable
within 60 days and 168,500 shares owned of record by Environmental Research,
Inc., of which company Dr. Charry is a 10% stockholder, President and Chief
Executive Officer.
(3) Includes 11,348 shares of Common Stock underlying options exercisable within
60 days and 6,250 shares underlying warrants exercisable within 60 days but
does not include shares owned of record by Environmental Research, Inc. of
which company Mr. Jacobson is a 10% stockholder, Vice President and Chief
Financial Officer. Mr. Jacobson disclaims beneficial ownership of these
shares.
(4) Includes 2,000 shares of Common Stock underlying options exercisable within
60 days and 8,333 shares of Common Stock underlying warrants exercisable
within 60 days.
(5) Includes 60,000 shares of Common Stock underlying warrants exercisable
within 60 days.
(6) Includes 86,427 shares of Common Stock underlying warrants exercisable
within 60 days.
(7) Includes 55,000 shares of Common Stock underlying warrants exercisable
within 60 days.
(8) Includes 137,500 shares of Common Stock underlying warrants (and warrants
underlying the warrants) exercisable within 60 days.
(9) Includes 90,000 shares of Common Stock underlying warrants exercisable
within 60 days.
(10) Includes 120,000 shares of Common Stock underlying warrants exercisable
within 60 days.
(11) The executive officers of Environmental Research, Inc. are Dr. Charry --
President and Chief Executive Officer and Mr. Jacobson -- Vice President,
Treasurer and Secretary. Dr. Charry and Mr. Jacobson are also executive
officers of the Company. The Board of Directors of Environmental Research,
Inc. consists of Dr. Charry, Mr. Jacobson, Mr. Bernstein, a director of the
Company, and Tor Lingjaerde. See "Management."
(12) Includes 89,793 shares of Common Stock underlying options exercisable
within 60 days and 99,583 shares of Common Stock underlying warrants
exercisable within 60 days and 168,500 shares owned of record by
Environmental Research, Inc., of which company Dr. Charry is President and
Chief Executive Officer.
53
<PAGE>
CERTAIN TRANSACTIONS
William S. Bernstein, a director of the Company, is also a partner of
Kalkines, Arky, Zall & Bernstein, a New York based law firm ("KAZB"). Until May
15, 1997, the Company subleased approximately 3,450 square feet from KAZB as its
principal place of business. During 1995 and 1996, rental charges due to KAZB
were $61,000 and $73,000 respectively. As of December 31, 1996, the Company owed
KAZB $146,000 for past due rental payments and other office services. As of
December 31, 1995, the Company owed KAZB $172,000 for past due rental payments
and other office services. In consideration for allowing the Company to defer
rental payments as well as payments for other office services, on August 1, 1995
the Company granted to KAZB five year warrants to purchase 20,000 shares of
Common Stock at an exercise price of $4.00 per share. In consideration of KAZB
allowing QuietPower to further defer rental payments, on May 10, 1996, the
Company canceled the warrants granted in August 1995 and issued five year
warrants to purchase 25,000 shares at an exercise price of $.01 per share. In an
agreement dated January 2, 1997, the Company satisfied $73,000 of its past due
balance with KAZB for rental payments and other office services by issuing to
the assignee of KAZB's claim against QuietPower, an aggregate 14,692 shares of
Common Stock and warrants to purchase 14,692 shares of Common Stock at $2.50 per
share.
Jonathan M. Charry, Chairman of the Board, President and Chief Executive
Officer of the Company, has personally guaranteed the Company's repayment of
certain investments in the Company totalling $175,000, which were made in
connection with private placements by the Company in 1995 and are currently
payable on demand. These obligations are evidenced by four guaranty agreements,
signed by Mr. Charry as a condition to the investments.
Alfred B. Thacher, a director of the Company, is also a principal in
Thacher, Vendig & Co. ("Thacher Vendig"), a New York based investment banking
and corporate development firm. The Company entered into a letter agreement with
Thacher Vendig dated April 1, 1997, pursuant to which Thacher Vendig shall
receive commissions, based on certain percentages of proceeds obtained by the
Company in connection with certain purchase, financing and venture transactions
(excluding the Offering) for financial and investment banking services. As of
the date hereof, the Company has paid fees to Thacher Vendig totalling $58,000
in 1995, $163,000 in 1996 and $262,500 in 1997, together with warrants to
purchase 60,000 shares of Common Stock at an exercise price of $2.50 per share,
for services including payment of finder's fees with respect to private
placement fund raising activities of the Company totalling $3.9 million,
acquisition searches and targeting (although the Company does not currently have
any understanding with respect to any companies or technologies which it may
wish to acquire), providing valuation analysis of the Company and potential
acquisition targets and evaluation of potential business transactions, such as
strategic alliances for the Company's magnetic field cancellation technology
development.
S. Carl Horn af Rantzien, a director of the Company, is also a principal in
Horn Konsult/Eapecs, a Stockholm based private equity management and consulting
syndicate ("Horn Konsult"). Pursuant to an agreement between Horn Konsult and
Thacher Vendig, Horn Konsult will assist Thacher Vendig in its work for the
Company and share all fees received by Thacher Vendig from the Company.
The Company has received advances totalling $80,000 from Environmental
Research, Inc. (of which the Chief Executive Officer of the Company is Chairman,
President and a 10% stockholder), the holder of 13.5% of the Company's issued
and outstanding shares of Common Stock, which amount is repayable upon
completion of this Offering. See "Use of Proceeds."
In connection with the Offering, the Company's Board of Directors has
adopted a policy whereby any future transactions between the Company and any of
its subsidiaries, affiliates, officers, directors, principal stockholders or any
affiliates of the foregoing will be on terms no less favorable to the Company
than could reasonably be obtained in "arm's length" transactions with
independent third parties, and any such transactions will also be approved by a
majority of the Company's disinterested outside directors.
54
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, par value $.01 per share, and 10,000 shares of Preferred Stock,
par value $.01 per share, issuable in series and with such relative rights and
preferences as may be designated by the Company's Board of Directors.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held on
all matters properly submitted to the stockholders for their vote. Holders of
shares of outstanding Common Stock are entitled to those dividends declared by
the Board of Directors out of legally available funds; and, in the event of
liquidation, dissolution or winding up of the affairs of the Company, holders
are entitled to receive, ratably, the net assets of the Company available to
holders of shares of Common Stock after distribution is made to preferred
stockholders. Holders of shares of outstanding Common Stock have no preemptive,
conversion, or redemptive rights. All of the issued and outstanding shares of
Common Stock are, and all unissued shares when issued pursuant to the exercise
of options or warrants will be, duly authorized, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Upon the completion of this Offering, the Company shall be authorized to
issue up to 10,000 shares of Preferred Stock, par value $.01 per share, of which
none will then be outstanding. The Board of Directors has the power, without
further action by the stockholders, to divide any and all shares of Preferred
Stock into one or more series and to fix and determine the relative rights and
preferences of the Preferred Stock, such as the designation of series and the
number of shares constituting such series, dividend rights, redemption and
sinking fund provisions, liquidating and dissolution preferences, conversion or
exchange rights and voting rights, if any. Issuances of Preferred Stock by the
Board of Directors may result in such shares having senior dividend and/or
liquidation preferences to the holders of shares of Common Stock and may dilute
the voting rights of such holders.
WARRANTS
As part of the Securities to be sold in this Offering, the Company is
issuing Warrants to purchase 2,000,000 shares of Common Stock. The following is
a brief summary of certain provisions of the Warrants, but such summary does not
purport to be complete and is qualified in all respects by reference to the
actual text of the Warrant Agreement between the Company, the Representative and
Continental Stock Transfer & Trust Company (the "Warrant Agent"). A copy of the
Warrant Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. See "Additional Information."
EXERCISE PRICE AND TERMS. Each Warrant entitles the registered holder
thereof to purchase, at any time during the four-year period commencing one year
after the date of this Prospectus, one share of Common Stock at a price of
$ per share [150% of the initial public offering price per share of
Common Stock], subject to adjustment in accordance with the anti-dilution and
other provisions referred to below. The holder of any Warrant may exercise such
Warrant by surrendering the certificate representing the Warrant to the Warrant
Agent, with the subscription form thereon properly completed and executed,
together with payment of the exercise price. Subject to compliance with
applicable state securities laws, the Warrants may be exercised at any time in
whole or in part at the applicable exercise price until expiration of the
Warrants. No fractional shares will be issued upon exercise of the Warrants.
The exercise price of the Warrants bears no relationship to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
ADJUSTMENTS. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock
55
<PAGE>
dividends, stock splits, combinations or reclassifications of the Common Stock,
or sale by the Company of shares of its Common Stock or other securities
convertible into Common Stock at a price below the then-applicable exercise
price of the Warrants. Additionally, an adjustment would be made in the case of
a reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation or sale of all or substantially all of
the assets of the Company in order to enable Warrant holders to acquire the kind
and number of shares of stock or other securities or property receivable in such
event by a holder of the number of shares of Common Stock that might otherwise
have been purchased upon the exercise of the Warrant.
REDEMPTION PROVISIONS. Commencing , 1998 (18 months after the date of
this Prospectus), with the consent of the Representative, the Warrants are
subject to redemption, in whole but not in part, at $0.05 per Warrant on 30
days' prior written notice to the warrantholders, provided that the average
closing sale price of the Common Stock as reported on the American Stock
Exchange equals or exceeds $ per share [175% of the then exercise price
per Warrant] (subject to adjustment for stock dividends, stock splits,
combinations or reclassifications of the Common Stock), for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. In the event the Company
exercises the right to redeem the Warrants, such Warrants will be exercisable
until the close of business on the business day immediately preceding the date
for redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants become wholly void and of no value. If a
market for the Warrants develops, the holder may sell the Warrants instead of
exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.
MODIFICATION OF WARRANTS. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the Warrant holders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than 30 days' prior written notice to the Warrant
holders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the Warrant holders. No other modifications may be made to the Warrants
without the consent of two-thirds of the Warrant holders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all of the shares of Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
there can be no assurance that it will be able to do so.
The Warrants are separately transferable immediately upon issuance. Although
the Securities will not knowingly be sold to purchasers in jurisdictions in
which the Securities are not registered or otherwise qualified for sale,
purchasers might buy Warrants in the after-market in, or may move to,
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue shares to persons desiring to exercise
their Warrants, and holders of Warrants would have no choice but to attempt to
sell the Warrants in a jurisdiction where such sale is permissible or allow them
to expire unexercised.
56
<PAGE>
RIGHTS OF WARRANTHOLDERS. Holders of the Warrants have no voting rights and
are not entitled to dividends. In the event of liquidation, dissolution, or
winding up of the affairs of the Company, holders of the Warrants will not be
entitled to participate in any liquidation distribution.
REGISTRATION RIGHTS
The Company has granted certain piggyback registration rights to BWM
Investments, an affiliate of Breslow & Walker, LLP, counsel to the Company,
relating to shares underlying warrants to purchase 25,000 shares of Common Stock
at an exercise price of $.01 per share, and to Kalkines, Arky, Zall & Bernstein,
of which William Bernstein, a director of the Company, is a partner, relating to
shares underlying warrants to purchase 25,000 shares of Common Stock at an
exercise price of $.01 per share and to Baltimore Gas and Electric Company
relating to 80,000 shares of Common Stock.
The Company has also granted certain demand and piggyback registration
rights to the Selling Stockholders, whose shares of Common Stock are being
registered hereby and shall be sold pursuant to a concurrent offering. See
"Certain Transactions," "Legal Matters," "Shares Eligible for Future Sale," and
"Concurrent Offering."
ANTI-TAKEOVER PROVISIONS
Upon consummation of this Offering, the Company will be subject to the
provisions of Section 203 of the Delaware Law ("Section 203"). Section 203
provides, with certain exceptions, that a Delaware corporation may not engage in
any of a broad range of business combinations with a person or an affiliate, or
associate of such person, who is an "interested stockholder" for a period of
three years from the date that such person became an interested stockholder
unless: (i) the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the Board of Directors
of the corporation before the person becomes an interested stockholder; (ii) the
interested stockholder acquired 85% or more of the outstanding voting stock of
the corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaw or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Certificate of Incorporation or Bylaws.
TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Warrants is Continental Stock Transfer & Trust Company, 2 Broadway, New
York, New York 10004.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that sales of shares of
Common Stock or even the availability of such shares for sale will have on the
market prices prevailing from time to time. The possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Common Stock or the Warrants and could impair
the Company's ability to raise capital through the sale of its equity
securities.
Upon the consummation of this Offering, the Company will have 3,084,013
shares of Common Stock and 2,000,000 Warrants outstanding (assuming no exercise
of warrants or options). All of the 2,000,000 shares of Common Stock and
2,000,000 Warrants being offered hereby will be immediately tradeable without
restriction or further registration under the Securities Act. Subject to certain
contractual restrictions as described below and the continued effectiveness of
the separate registration statement relating to these shares, an additional
507,500 shares of Common Stock issuable upon exercise of the Private Placement
Warrants will be freely tradeable. See "Concurrent Offering." The Selling
Stockholders have agreed not to sell any of such securities for a period of
three months from the date of this Prospectus and not to sell 137,500 of such
securities for a period of nine months from the date of this Prospectus without
the prior written consent of the Representative. The 1,084,013 shares of Common
Stock issued and outstanding prior to this Offering are deemed to be "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act and may be sold without registration pursuant to such rule at
varying times, commencing 90 days from the date hereof. In addition, the Company
currently has outstanding options and warrants (not including the Warrants and
Private Placement Warrants) to purchase an additional 1,654,405 shares of Common
Stock. All of the officers and directors of the Company and all holders of 1% or
more of the issued and outstanding Common Stock and all holders of options,
warrants or other securities convertible, exercisable, or exchangeable for 1% or
more of the issued and outstanding Common Stock (except as described above) have
agreed not to, directly or indirectly, issue, offer, agree or offer to sell,
sell, transfer, assign, encumber, grant an option for the purchase or sale of,
pledge, hypothecate or otherwise dispose of any beneficial interest in such
securities for a period of 13 months following the effective date of the
Registration Statement without the prior written consent of the Company and the
Representative. An appropriate legend shall be marked on the face of the
certificates representing all such securities. The Company has granted certain
piggyback registration rights to BWM Investments, an affiliate of Breslow &
Walker, LLP, counsel to the Company, and Kalkines, Arky, Zall & Bernstein, of
which William Bernstein, a director of the Company, is a partner, in each case
as to 25,000 shares of Common Stock underlying warrants and to Baltimore Gas and
Electric Company as to 80,000 shares of Common Stock. See "Certain Transactions"
and "Legal Matters," "Principal Stockholders," "Description of Securities,"
"Risk Factors--Shares Eligible for Future Sale," and "Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year (including the holding period of any prior owner except an
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (approximately 30,840 shares immediately
after this Offering), or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner except
an affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts 90 days after the Company becomes
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), in reliance upon Rule 144, but without
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<PAGE>
compliance with certain restrictions including the holding period requirements
contained in Rule 144. Shortly after this Offering, the Company intends to file
a registration statement on Form S-8 under the Securities Act covering shares of
Common Stock reserved for issuance under the Company's stock plans. Such
registration statement will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to affiliates, be available for sale
in the open market, unless such shares are subject to vesting restrictions with
the Company or the lock-up agreements described above.
59
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the "Underwriting Agreement") to purchase from the
Company and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective number of Shares and Warrants set forth
opposite their names:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
UNDERWRITER SHARES WARRANTS
- -------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
National Securities Corporation.....................................
---------- ----------
Total......................................................... 2,000,000 2,000,000
---------- ----------
---------- ----------
</TABLE>
The Underwriters are committed to purchase all the Shares of Common Stock
and Warrants offered hereby, if any of such Securities are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $ per Share and
$ per Warrant. Such dealers may reallow a concession not in excess of
$ per Share and $ per Warrant to certain other dealers. After the
commencement of the Offering, the public offering prices, concession and
reallowance may be changed by the Representative.
The Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent (5%) of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representative a non-accountable expense allowance equal to
3% of the gross proceeds derived from the sale of the Securities underwritten,
of which $50,000 has been paid to date.
The Company has granted to the Underwriters an Over-allotment option,
exercisable during the forty-five (45) day period from the date of this
Prospectus, to purchase up to an additional 300,000 shares of Common Stock
and/or 300,000 Warrants at the initial public offering price per Share and
Warrant, respectively, offered hereby, less underwriting discounts and the
non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the
Securities offered hereby. To the extent such option is exercised in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional Securities proportionate to
its initial commitment.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
up to 200,000 shares of Common Stock and/or 200,000 Warrants (the
"Representative's Warrants"). The Representative's Warrants are initially
exercisable at a price of $ per share of Common Stock [120% of the initial
public offering price per Share]and $ per Warrant [120% of the initial
public offering price per Warrant] for a period of four (4) years, commencing at
the beginning of the second year after their issuance and sale and are
restricted from sale, transfer, assignment or hypothecation for a period of
twelve (12) months from the date hereof, except to officers of the
Representative. The Representative's Warrants provide for adjustment in the
number of shares of Common Stock and Warrants issuable upon the exercise thereof
and in the exercise
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<PAGE>
price of the Representative's Warrants as a result of certain events, including
subdivisions and combinations of the Common Stock. The Representative's Warrants
grant to the holders thereof certain rights of registration for the securities
issuable upon exercise thereof.
All officers and directors of the Company and all holders of 1% or more of
the issued and outstanding Common Stock and all holders of options, warrants or
other securities convertible, exercisable or exchangeable for 1% or more of the
issued and outstanding Common Stock have agreed not to, directly or indirectly,
issue, offer, agree or offer to sell, sell, transfer, assign, encumber, grant an
option for the purchase or sale of, pledge, hypothecate or otherwise dispose of
any beneficial interest in such securities for a period of thirteen (13) months
following the effective date of the Registration Statement without the prior
written consent of the Company and the Representative. An appropriate legend
shall be marked on the face of certificates representing all such securities.
The Company has agreed not to, without the prior written consent of the
Representative, issue, sell, agree or offer to sell, grant an option for the
purchase or sale of, or otherwise transfer or dispose of any of its securities
for a period of thirteen (13) months following the effective date of the
Registration Statement, except in connection with the exercise of the
Underwriters' Over-allotment Option and the issuance of shares of Common Stock
upon the exercise of currently outstanding options and warrants.
The Company has agreed that, for a period of five (5) years from the
effective date of the Registration Statement, the Representative may designate
for election one person to the Company's Board of Directors. In the event the
Representative elects not to exercise the right, then it may designate one
person to attend all the Company's Board of Directors meetings as an observer.
Such person shall be entitled to attend all meetings and to receive all notices
of meetings of the Company's Board of Directors and all other correspondence and
communications sent by the Company to members of its Board of Directors. The
Company has agreed to reimburse designees of the Representative for their
out-of-pocket expenses incurred in connection with their attendance of meetings
of the Company's Board of Directors.
Prior to this Offering, there has been no public market for the Common Stock
or the Warrants. Consequently, the initial public offering prices of the
Securities have been determined by negotiation between the Company and the
Representative and do not necessarily bear any relationship to the Company's
asset value, net worth or other established criteria of value.
Upon the exercise of any Warrants more than one year after the date of this
Prospectus, which exercise was solicited by the Representative, and to the
extent not inconsistent with the guidelines of the National Association of
Securities Dealers, Inc. and the Rules and Regulations of the Commission, the
Company has agreed to pay the Representative a commission of five percent (5%)
of the aggregate exercise price of such Warrants in connection with bona fide
services provided by the Representative relating to any warrant solicitation
undertaken by the Representative. However, no compensation will be paid to the
Representative in connection with the exercise of the Warrants if (a) the market
price of the Common Stock is lower than the exercise price, (b) the Warrants
were held in a discretionary account, or (c) the Warrants are exercised in an
unsolicited transaction where the holder of the Warrants has not stated in
writing that the transaction was solicited and has not designated in writing the
Representative as soliciting agent. Unless granted an exemption by the
Commission from its Rule 101 under the Securities Act, the Representative and
any soliciting broker-dealers will be prohibited from engaging in any market-
making activities or solicited brokerage activities with regard to the Company's
securities for the periods prescribed by Rule 101 prior to any solicitation of
the exercise of the Warrants until the later of the termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
the Representative or any soliciting broker-dealers may have to receive a fee
for the exercise of the Warrants following such solicitation. As a result, the
Representative and any soliciting broker-dealers may be unable to continue to
provide a market for the Common Stock or Warrants during certain periods while
the Warrants are exercisable. If the Representative has engaged in any of the
activities prohibited by Rule 101
61
<PAGE>
during the periods described above, the Representative undertakes to waive
unconditionally its rights to receive a commission on the exercise of such
Warrants.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Securities. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
Common Stock or Warrants for the purpose of stabilizing their respective market
prices. The Underwriters also may create a short position for the account of the
Underwriters by selling more Securities in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Securities in the open market following completion of the Offering to cover all
or a portion of such short position. The Underwriters may also cover all or a
portion of such short position by exercising the Underwriters' Over-allotment
Option referred to above. In addition, the Representative, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer participating
in the Offering) for the account of other Underwriters, the selling concession
with respect to Securities that are distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Securities at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Breslow & Walker, LLP, New York, New York. BWM Investments, an
affiliate of Breslow & Walker, LLP, is the owner of warrants to purchase 25,000
shares of Common Stock at an exercise price of $.01 per share. Orrick,
Herrington & Sutcliffe LLP, New York, New York, has acted as counsel to the
underwriters in connection with this Offering.
EXPERTS
The balance sheet as at December 31, 1996 and the statements of operations,
capital deficiency and cash flows for the years ended December 31, 1995 and 1996
of QuietPower Systems, Inc., appearing in this Prospectus and Registration
Statement have been audited by Richard A. Eisner & Company, LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C., a Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, for the registration of Securities offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information contained in the Registration Statement. For further information
with respect to the Company and the Securities offered hereby, reference is made
to the Registration Statement, including exhibits thereto, which may be
inspected, without charge, at the office of the Securities and Exchange
Commission, or copies of which may be obtained from the Commission in
Washington, D.C., upon payment of the requisite fees, or from the Commission's
Website at http://www.sec.gov. Statements contained in this Prospectus as to the
intent of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
62
<PAGE>
QUIETPOWER SYSTEMS, INC.
-I N D E X -
<TABLE>
<CAPTION>
PAGE
NUMBER
-------------
<S> <C>
REPORT OF INDEPENDENT AUDITORS......................................................................... F-2
BALANCE SHEETS AS AT DECEMBER 31, 1996 AND MARCH 31, 1997 (UNAUDITED).................................. F-3
STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED DECEMBER 31, 1996 AND FOR
THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND MARCH 31, 1997 (UNAUDITED).......................... F-4
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED DECEMBER
31, 1996 AND FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997 (UNAUDITED)............................. F-5
STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED DECEMBER 31, 1996 AND FOR
THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND MARCH 31, 1997 (UNAUDITED).......................... F-6
NOTES TO FINANCIAL STATEMENTS.......................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
QuietPower Systems, Inc.
We have audited the accompanying balance sheet of QuietPower Systems, Inc.
as at December 31, 1996 and the related statements of operations, changes in
capital deficiency and cash flows for the years ended December 31, 1995 and
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of QuietPower Systems, Inc. as at
December 31, 1996 and the results of its operations and its cash flows for the
years ended December 31, 1995 and December 31, 1996 in conformity with generally
accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
April 29, 1997
F-2
<PAGE>
QUIETPOWER SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------- MARCH 31,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................ $ 6,000 $ 6,000
Accounts receivable (including unbilled of $49,000 and $46,000)..................... 81,000 99,000
Other current assets................................................................ 8,000 6,000
------------- -------------
Total current assets.......................................................... 95,000 111,000
Equipment, net...................................................................... 40,000 41,000
Technology rights, less accumulated amortization of $172,000 and $187,000........... 328,000 313,000
Deferred registration costs......................................................... 150,000
Deferred financing costs less accumulated amortization of $4,000.................... 30,000
------------- -------------
TOTAL......................................................................... $ 463,000 $ 645,000
------------- -------------
------------- -------------
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Due to bank......................................................................... $ 13,000 $ 25,000
Accounts payable and accrued expenses............................................... 359,000 752,000
Due to Noise Cancellation Technologies, Inc., including technology rights of
$100,000 and $75,000.............................................................. 312,000 487,000
Advances from stockholder........................................................... 80,000
Notes payable....................................................................... 65,000 683,000
------------- -------------
Total current liabilities..................................................... 749,000 2,027,000
Advances from stockholder........................................................... 75,000
Due to Noise Cancellation Technologies, Inc., less current portion.................. 200,000
Notes payable, less current portion................................................. 446,000 200,000
Other liabilities................................................................... 73,000
------------- -------------
Total liabilities............................................................. 1,543,000 2,227,000
------------- -------------
Commitments and other matters (Notes D and J)
Capital deficiency:
Preferred stock--$.01 par value, 10,000 shares authorized; 1,325 shares of Series A
convertible preferred stock issued and outstanding (liquidation value
$1,325,000)....................................................................... 1,059,000 1,059,000
Common stock--$.01 par value, 10,000,000 shares authorized; 684,855 and 699,547
shares issued and outstanding at December 31, 1996 and March 31, 1997............. 7,000 7,000
Additional paid-in capital.......................................................... 3,074,000 3,169,000
Unearned portion of compensatory stock options and warrants......................... (303,000) (276,000)
Accumulated (deficit)............................................................... (4,917,000) (5,541,000)
------------- -------------
Total capital deficiency...................................................... (1,080,000) (1,582,000)
------------- -------------
TOTAL......................................................................... $ 463,000 $ 645,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
QUIETPOWER SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------------ ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product sales........................................ $ 35,000 $ 216,000 $ 80,000 $ 51,000
Development funding.................................. 315,000
------------ ------------- ------------- -------------
Total revenues................................... 350,000 216,000 80,000 51,000
------------ ------------- ------------- -------------
Costs and expenses:
Cost of sales........................................ 29,000 260,000 66,000 76,000
Development costs.................................... 335,000 187,000 30,000 92,000
Selling, general and administrative.................. 843,000 1,714,000 276,000 418,000
------------ ------------- ------------- -------------
1,207,000 2,161,000 372,000 586,000
------------ ------------- ------------- -------------
Interest expense....................................... 17,000 333,000 35,000 89,000
------------ ------------- ------------- -------------
NET (LOSS)............................................. (874,000) (2,278,000) (327,000) (624,000)
Dividend on preferred stock............................ (238,000)
------------ ------------- ------------- -------------
Net (loss) after preferred dividend.................... $ (874,000) $ (2,516,000) $ (327,000) $ (624,000)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net (loss) per common share............................ $ (0.62) $ (1.53) $ (0.23) $ (0.39)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Weighted average number of shares outstanding.......... 1,402,625 1,484,055 1,431,226 1,590,997
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
QUIETPOWER SYSTEMS, INC.
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
SERIES A UNEARNED
CONVERTIBLE PORTION OF
PREFERRED COMMON STOCK ADDITIONAL COMPENSATORY
STOCK ---------------------- PAID-IN STOCK OPTIONS ACCUMULATED
AMOUNT SHARES AMOUNT CAPITAL AND WARRANTS (DEFICIT) TOTAL
----------- --------- ----------- ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--December 31, 1994............ 641,399 $ 6,000 $1,326,000 $(1,527,000) $ (195,000)
Stock issued in connection with
private placements.................. 33,456 1,000 174,000 175,000
Fair value of warrants issued with
debt................................ 16,000 16,000
Fair value of stock option issued to
consultant.......................... 2,000 2,000
Warrants issued in consideration of
forbearance of demand payment....... 39,000 39,000
Net (loss) for the year ended December
31, 1995............................ (874,000) (874,000)
--------- ----------- ----------- ------------ ----------
Balance--December 31, 1995............ 674,855 7,000 1,557,000 (2,401,000) (837,000)
Stock issued in connection with
private placement................... 10,000 68,000 68,000
Stock issued in connection with
private placement of Series A
preferred stock, net of expenses of
$266,000............................ $1,059,000 1,059,000
Fair value of warrants issued with
debt................................ 493,000 493,000
Fair value of stock options and
warrants issued to consultants...... 209,000 209,000
Warrants issued in consideration of
forbearance of demand payment....... 169,000 169,000
Compensatory stock options and
warrants issued..................... 340,000 $(303,000) 37,000
Fair value of warrants issued as
preferred dividend.................. 238,000 (238,000) 0
Net (loss) for the year ended December
31, 1996............................ (2,278,000) (2,278,000)
----------- --------- ----------- ----------- ------------- ------------ ----------
BALANCE--DECEMBER 31, 1996............ 1,059,000 684,855 7,000 3,074,000 (303,000) (4,917,000) (1,080,000)
Stock issued with warrants for
occupancy costs..................... 14,692 73,000 73,000
Compensation attributable to stock
options and warrants................ 27,000 27,000
Fair value of warrants issued with
debt................................ 22,000 22,000
Net (loss) for the three-month period
ended March 31, 1997................ (624,000) (624,000)
----------- --------- ----------- ----------- ------------- ------------ ----------
BALANCE--MARCH 31, 1997 (Unaudited)... $1,059,000 699,547 $ 7,000 $3,169,000 $(276,000) $(5,541,000) $(1,582,000)
----------- --------- ----------- ----------- ------------- ------------ ----------
----------- --------- ----------- ----------- ------------- ------------ ----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
QUIETPOWER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- ------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
----------- ------------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss)..................................................... $ (874,000) $ (2,278,000) $ (327,000) $ (624,000)
Adjustments to reconcile net (loss)
to net cash (used in) operating activities:
Depreciation and amortization................................ 77,000 78,000 18,000 25,000
Stock options and warrants issued:
Employee and director compensation......................... 37,000 5,000 27,000
Interest................................................... 16,000 269,000 32,000 59,000
Consulting................................................. 2,000 209,000 7,000
Forbearance of demand payment.............................. 39,000 169,000
Changes in operating assets and
liabilities:
(Increase) decrease in accounts receivable................. 152,000 (71,000) (32,000) (18,000)
(Increase) decrease in other current assets................ (8,000) (10,000) 2,000
Increase in accounts payable and accrued expenses.......... 202,000 93,000 268,000
Increase (decrease) in due to
Noise Cancellation Technologies, Inc..................... 1,000 (9,000)
----------- ------------- ----------- -----------
Net cash (used in) operating activities.................. (385,000) (1,604,000) (214,000) (261,000)
----------- ------------- ----------- -----------
Cash flows from investing activities:
Purchase of equipment.......................................... (7,000) (40,000) (6,000) (7,000)
Payment for technology rights.................................. (150,000) (25,000)
----------- ------------- ----------- -----------
Net cash (used in) investing activities.................. (7,000) (190,000) (6,000) (32,000)
----------- ------------- ----------- -----------
Cash flows from financing activities:
Net proceeds from sale of common stock......................... 175,000 68,000 68,000
Advance from bank.............................................. 13,000 12,000 12,000
Net proceeds from sale of Series A preferred stock............. 1,059,000
Proceeds from notes payable, net of expenses................... 93,000 855,000 120,000 301,000
Repayment of notes payable..................................... (213,000)
Net advances from (payments to) stockholder.................... 22,000 (2,000) 5,000
Deferred registration costs.................................... (25,000)
----------- ------------- ----------- -----------
Net cash provided by financing activities................ 290,000 1,780,000 200,000 293,000
----------- ------------- ----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (102,000) (14,000) (20,000) 0
Cash--beginning of year.......................................... 122,000 20,000 20,000 6,000
----------- ------------- ----------- -----------
CASH--END OF YEAR................................................ $ 20,000 $ 6,000 $ 0 $ 6,000
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest....................... $ 11,000
Noncash financing activities:
Registration costs incurred included in accounts payable
and accrued expenses at March 31, 1997................... $ 125,000
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE A)--THE COMPANY:
QuietPower Systems, Inc. (the "Company") was incorporated on May 4, 1992.
The Company (formerly "Active Acoustical Solutions, Inc.") is engaged in the
development, commercialization and marketing of products using two basic
technologies: active noise and vibration control, which is used for transformers
and communication headsets; and failure diagnostic and condition monitoring,
which is used for substation equipment. For active noise and vibration control
the Company is dependent on the proprietary technology which Noise Cancellation
Technologies, Inc. ("NCT") holds or has rights to (see Note C).
The Company has incurred substantial losses since inception and at December
31, 1996 had a working capital deficiency and capital deficiency of $654,000 and
$1,080,000, respectively. These losses have been funded primarily from the net
proceeds of debt and equity securities and from project funding provided by gas
and electric utility companies. The Company has not yet generated any
significant revenues from sales of its products. The Company obtained additional
financing during February, March and April 1997 (see Note L) and is seeking
additional financing through a proposed initial public offering of common stock
and warrants (see Note H[4]). However, there is no assurance when or if such
funding can be obtained or whether it will be sufficient to fund operations.
(NOTE B)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[2] EQUIPMENT:
Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets which range
from three to five years.
[3] FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of cash, accounts receivable, accounts payable and notes
payable approximates their fair value.
[4] TECHNOLOGY RIGHTS:
Manufacturing, marketing and distribution rights acquired from NCT (see Note
C) are stated at cost and are being amortized on the straight-line basis over 7
years. The Company evaluates the appropriateness of the amortization period and
related carrying amount using several factors, including the estimated future
undiscounted cash flows from revenues resulting from these rights.
[5] REVENUE RECOGNITION:
Revenue from development contracts and transformer quieting system sales are
recognized as costs are incurred and services are performed under the percentage
of completion method. Under the percentage of completion method, revenues and
gross profit are recognized as work is performed based on the
F-7
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE B)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
[5] REVENUE RECOGNITION: (CONTINUED)
relationship between actual costs incurred and total estimated costs to
complete. Estimated losses are recorded when identified.
Revenue from sales of communication headsets are recognized upon shipment.
[6] NET LOSS PER COMMON SHARE:
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. In accordance with Staff Accounting
Bulletin No. 83, common and convertible preferred stock issued and options and
warrants granted during the twelve-month period prior to filing of the proposed
initial public offering ("IPO") have been included in the calculation of common
and common equivalent shares outstanding as if they were outstanding for all
periods presented using the treasury stock method and an assumed public offering
price of $8.50 per share.
[7] STOCK-BASED COMPENSATION:
During 1996 the Company adopted Statement of Financial Accounting Standards
Board No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or other awards granted to employees or to continue to
follow the intrinsic value method set forth in APB Opinion 25, "Accounting for
Stock Issued to Employees" ("APB 25") but disclose the pro forma effects on net
income (loss) had the fair value of the options been expensed. The Company has
elected to apply APB 25 in accounting for stock options and warrants (see Note
H). Accordingly, the Company accounts for the difference between the exercise
price of compensatory stock options and warrants and the fair value of the stock
as "Unearned compensatory stock options and warrants," which the Company charges
to operations over the vesting period.
[8] INTERIM FINANCIAL INFORMATION:
The accompanying financial statements as at March 31, 1997 and for the three
months ended March 31, 1996 and March 31, 1997 are unaudited but, in the opinion
of management of the Company, reflect all adjustments (consisting only of normal
and recurring adjustments) necessary for a fair presentation. The results of
operations for the three-month period are not necessarily indicative of the
results that may be expected for the full year ending December 31, 1997.
(NOTE C)--LICENSED TECHNOLOGY RIGHTS:
The Company entered into a master agreement (the "NCT Agreement") in March
1995, which was amended in April 1995 and May 1996, with NCT which superseded
previous agreements entered into in 1993 (the "1993 Agreements"). Under the NCT
Agreement, the Company was granted an exclusive and worldwide license, under
patents and patent applications owned or controlled by NCT, to manufacture,
market, sell and distribute transformer quieting products and gas turbine
quieting products and all future products funded by the Company related to the
electric power generation, transmission, distribution and supply industries. The
NCT Agreement provides that after the Company recoups 150% of its development
costs from pre-tax profit, it shall pay a royalty of 9% on the first $6,000,000
in sales of noise reduction systems and 6% of sales thereafter. For these rights
the Company agreed to pay a license fee to NCT of $750,000, $250,000 of which
the Company paid to NCT in June of 1994 pursuant to the 1993 Agreements, and the
balance payable in equal monthly installments. In April 1995 the Company also
returned a warrant to purchase 750,000 shares of NCT's common stock granted
pursuant to the 1993 Agreements and the $500,000 balance due NCT for the
technology rights was reduced to $250,000 to be paid in 30 monthly
F-8
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE C)--LICENSED TECHNOLOGY RIGHTS: (CONTINUED)
installments of $8,333. Accordingly, the Company recorded technology rights of
$250,000 in 1995 which is being amortized over seven years. Amortization for the
years ended December 31, 1995 and December 31, 1996 was $68,000 and $63,000,
respectively and $16,000 for each of the three months ended March 31, 1996 and
March 31, 1997. At December 31, 1996 and March 31, 1997 the balance due for
technology rights was $100,000 and $75,000, respectively, payable in monthly
installments of $8,333.
In addition, in October 1994, the Company entered into a distributor
agreement with NCT relating to industrial communication headsets. The agreement
provides that the Company shall have nonexclusive distribution rights.
In April 1997 the Company amended the NCT Agreement whereby the Company
agreed to pay $336,000 relating to past engineering services for active quieting
system development and for headset purchases (and unrelated to the $750,000
license fee). In accordance with the amended NCT Agreement, the Company paid
$136,000 to NCT in April 1997 and is required to pay $200,000 upon the earlier
of (a) the closing date of the contemplated IPO, or (b) January 1, 1998. The
amended agreement also requires the Company to repay the $200,000 due to NCT by
applying towards repayment, 15% of all funds received after April 21, 1997 from
all financing activities other than the proposed IPO. The agreement also
requires that the Company pay NCT interest at 10% per annum on the balance
outstanding after July 1, 1997. As a result of this amendment the Company
classified $200,000 as a noncurrent liability due to NCT at December 31, 1996.
(NOTE D)--JOINT VENTURE AGREEMENTS:
On November 13, 1996 the Company entered into a five year joint venture (the
"GE JV Agreement") with Prolec-GE, S. de R.L. de C.V. ("Prolec-GE"), a joint
venture between General Electric Company and Prolec S.A. de C.V., to develop,
market and sell failure diagnostic and condition monitoring systems. The GE JV
Agreement provides for sole ownership of all of the acoustically-based failure
diagnostic and condition monitoring technology by the Company. Earnings and
losses from the joint venture will be shared equally and each party is
obligated, upon approval of each new project by the parties, to contribute such
personnel and resources as shall have been approved in connection with such
project.
On June 15, 1996 the Company entered into a five year joint venture (the
"ABB JV Agreement") with ABB Secheron SA, an indirect wholly owned subsidiary of
ABB Asea Brown Boveri Limited ("ABB"), to further develop, market and sell
active noise and vibration control systems for transformers for the European
market. The ABB JV Agreement provides for the sole ownership of the active noise
and vibration control technology by the Company. Earnings and losses from the
joint venture will be shared equally and each party is obligated, upon approval
by the parties of a product improvement program, to contribute such personnel
and resources to a project as shall have been approved in connection with such
project.
The joint venture agreements do not specify dollar amounts to be funded and
as of December 31, 1996 the Company has not been requested to provide funds for
either joint venture. Services charged to or incurred by the joint ventures were
not material. During the three months ended March 31, 1997 the Company incurred
costs of $8,000 and $63,000 relating to the GE JV Agreement and the ABB JV
Agreement, respectively.
F-9
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE E)--EQUIPMENT:
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1996 1997
----------- -----------
Furniture and fixtures................................ $ 2,000 $ 4,000
<S> <C> <C>
Computers............................................. 44,000 49,000
Field equipment....................................... 23,000 23,000
----------- -----------
Total............................................. 69,000 76,000
Less accumulated depreciation......................... 29,000 35,000
----------- -----------
Net............................................... $ 40,000 $ 41,000
----------- -----------
----------- -----------
</TABLE>
(NOTE F)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C>
Professional fees.................................................. $ 107,000 $ 165,000
Occupancy costs (Note K)........................................... 73,000 95,000
Interest........................................................... 54,000 84,000
Payroll related costs.............................................. 105,000
Registration costs................................................. 125,000
Others............................................................. 125,000 178,000
------------ ----------
$ 359,000 $ 752,000
------------ ----------
------------ ----------
</TABLE>
F-10
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE G)--NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C>
Note bearing interest at 6% per annum, convertible into 6,250 shares of common stock,
guaranteed by the president of the Company, and due on demand (1).................... $ 25,000 $ 25,000
Notes bearing interest at 12% per annum, convertible into 28,382 shares of common stock
and due on demand (1)................................................................ 175,000 175,000
Notes bearing interest at 12% per annum through November 1996 and 15% thereafter, due
in four quarterly installments of $133,750 beginning February 1997 (face value
$535,000, effective interest rate, giving effect to the value of warrants issued
therewith, ranging from 194% to 246%), and collateralized by all of the assets of the
Company. The loan agreement, among other matters, requires that certain officers and
significant stockholders of the Company grant proxies for their shares of the Company
in the event of default with respect to any payments (2)............................. 311,000 367,000
Notes issued in February and March 1997, bearing interest at 10% per annum (face values
of $335,000, effective interest rate, giving effect to the value of the warrants
issued therewith, 16.9%) , convertible (after an IPO) into common stock at the IPO
price, due and payable together with accrued but unpaid interest at the option of the
holder, on the earliest of the closing of an initial public offering of the Company's
common stock, but no later than one year after the date the notes were issued (3).... 316,000
------------ ----------
511,000 883,000
Less current maturities................................................................ 65,000 683,000
------------ ----------
$ 446,000 $ 200,000
------------ ----------
------------ ----------
</TABLE>
- ------------------------
(1) In conjunction with the issuance of these notes, the Company granted
investors warrants to purchase 29,926 shares of common stock at an exercise
price ranging from $3.625 to $6.80 per share. During the years ended
December 31, 1995 and December 31, 1996 the Company charged to interest
$3,000 and $23,000, respectively, representing the fair value of these
warrants. On April 8, 1997, certain noteholders elected to receive 39,466
shares of common stock in lieu of principal and interest of $200,000 and
$27,144, respectively. As a result of these elections $200,000 of this
liability is classified as long-term debt at December 31, 1996 and March 31,
1997.
(2) In conjunction with the issuance of these notes (the "Secured Notes") the
Company granted the investors 107,000 units, at $0.01 per unit (the "Unit")
each comprised of one share of common stock and a warrant to purchase one
share of common stock at 150% of the IPO price. The Company valued these
units at $362,000, which is being accounted for as debt discount. In April
1997 the Secured Notes were amended whereby the Company paid the principal
payment due February 24, 1997 of $133,750 plus accrued interest of $16,752
and the remaining principal of $401,250 and accrued interest is due at the
earlier of the closing of an initial public offering or a private offering
greater than $3 million, but no later than January 15, 1998. In connection
therewith the Company granted the holders
F-11
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE G)--NOTES PAYABLE: (CONTINUED)
26,750 additional Units at $0.01 per unit. The Company valued these warrants
at $170,000 representing the fair value at date of grant which will be
charged to operations. As a result of this amendment, $246,000 of this
liability is classified as long-term debt at December 31, 1996.
(3) In conjunction with the issuance of the subordinated notes, the Company
issued warrants to purchase 8,934 shares of common stock exercisable at the
lower of (i) one-half of the IPO price per share, or (ii) $6.00 per share.
The Company valued the warrants at $22,000 representing the fair value at
the date of grant and is being accounted for as debt discount. In addition
the Company incurred offering costs of $34,000 paid to the related party
referred to in Note K[3]. In April 1997 the Company issued additional notes
under the same terms aggregating $290,000 and incurred $29,000 in additional
offering costs paid to a related party.
In addition, during 1995 and 1996 the Company issued notes of $68,000 and
$145,000, respectively, which were repaid in 1996. In conjunction with these
notes and certain extensions granted, the Company issued warrants. The Company
charged to interest $13,000 and $108,000 for the years ended December 31, 1995
and December 31, 1996, respectively, for the fair value of these warrants.
(NOTE H)--CAPITAL DEFICIENCY:
[1] PREFERRED STOCK:
During 1996 the Board of Directors designated a total of 1,325 shares of
preferred stock as Series A convertible preferred stock. The holders of Series A
preferred stock are entitled to (i) convert on a one-for-two hundred basis to
common stock plus five-year warrants to purchase 200 shares of common stock at
$2.50 per share subject to adjustment, as defined, (ii) voting rights equivalent
to voting rights of common stockholders at 200 hundred votes per share (iii)
liquidation preferences of $1,000 per preferred share and (iv) dividends when
declared equal to 200 times the amount of any cash dividend payable to holders
of common stock. The Series A preferred stock will automatically convert into
265,000 shares of common stock and 265,000 warrants to purchase common stock
upon the completion of an IPO. During 1996, the Company recorded $238,000 as a
dividend, representing the fair value of warrants issuable upon conversion of
the preferred stock. The number of shares of common stock and warrants are
subject to adjustment to the extent the investors do not receive a 35% annual
rate of return on the amount invested, based on the value of the securities
received upon conversion at the IPO.
[2] STOCK OPTIONS:
The Company applies APB 25 in accounting for stock based compensation to
employees and, accordingly, recognizes compensation expense for the difference
between the fair value of the underlying common stock and the exercise price of
the option and warrant at the date of grant. The effect of applying SFAS No. 123
on 1995 and 1996 pro forma net loss is not necessarily representative of the
effects on reported net loss for future years due to, among other things, (1)
the vesting period of the stock options and (2) the fair value of additional
stock options that may be granted in future years. Had compensation cost for the
Company's warrants and stock options granted to employees been determined based
upon the fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123, the Company's net loss and net loss per share would have
been approximately (i) $(893,000) and $(0.64) for the year ended December 31,
1995, (ii) $(2,364,000) and $(1.59) for the year ended December 31, 1996, (iii)
$(348,000) and $(0.24) for the three months ended March 31, 1996, (iv)
$(645,000) and $(0.41) for the three months ended March 31, 1997, respectively.
The weighted average fair value of the options and
F-12
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE H)--CAPITAL DEFICIENCY: (CONTINUED)
[2] STOCK OPTIONS: (CONTINUED)
warrants granted during 1995 and 1996 are estimated at $1.21 and $1.88,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: dividend yield 0%, volatility of 30%, risk-free
interest rates ranging from 5.8% to 6.2% for 1995 and 5.2% to 5.8% for 1996, and
expected life of four years for five year options and warrants and six years for
ten year options and warrants.
The Company's 1993 stock option plan (the "1993 Plan") provides for the
granting of options to purchase up to 250,000 shares of common stock, pursuant
to which officers, directors, key employees and consultants are eligible to
receive incentive and/or nonstatutory stock options. Options granted under the
1993 Plan are exercisable for a period of up to 10 years from date of grant at
an exercise price which is not
less than the fair value on date of grant, except that the exercise price of
options granted to a stockholder owning more than 10% of the outstanding capital
stock may not be less than 110% of the fair value of the common stock at date of
grant. Options generally vest 25% annually on the anniversary of the date of
grant.
Additional information with respect to the 1993 Plan activity is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C>
1995 1996
---------------------- ----------------------
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...................................... 88,390 $ 3.80 210,990 $ 4.20
Options granted....................................................... 127,600 $ 4.47 36,000 $ 4.48
Options cancelled or expired.......................................... (5,000) $ 4.00 (7,500) $ 5.00
--------- ---------
Outstanding at end of year............................................ 210,990 $ 4.20 239,490 $ 4.22
--------- ---------
--------- ---------
Options exercisable at year end....................................... 48,733 $ 3.57 110,235 $ 4.07
--------- ---------
--------- ---------
</TABLE>
During the three months ended March 31, 1997 no options were granted under
the 1993 Plan. As of March 31, 1997, 115,958 options with a weighted average
exercise price of $4.09 were exercisable.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ---------------- ----------- --------------- ----------- ----------- -----------
$ 2.50 27,500 3.77 $ 2.50 23,500 $ 2.50
$ 4.00 to $5.00 196,890 7.73 $ 4.11 80,445 $ 4.17
$ 8.77 15,100 3.97 $ 8.77 6,290 $ 8.77
----------- -----------
Total 239,490 7.04 $ 4.22 110,235 $ 4.07
----------- -----------
----------- -----------
</TABLE>
F-13
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE H)--CAPITAL DEFICIENCY: (CONTINUED)
[2] STOCK OPTIONS: (CONTINUED)
As of December 31, 1996 and March 31, 1997, options for the purchase of
10,510 shares were available for future grant under the 1993 Plan.
[3] WARRANTS:
The Company has the following warrants outstanding for the purchase of its
common stock:
<TABLE>
<CAPTION>
EXERCISE DECEMBER 31,
PRICE -------------------- MARCH 31,
PER SHARE EXPIRATION DATE 1995 1996 1997
- --------- ---------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
$ .01 May 2001........................................................ 157,000(1) 157,000(1)
.10 December 2006................................................... 20,000(2) 20,000(2)
2.50 August 2001..................................................... 5,000 5,000
2.50 October 2001.................................................... 45,000 45,000
2.50 December 2001................................................... 85,500 85,500
2.50 January 2002.................................................... 14,692
2.50 April 2006...................................................... 125,000(2) 125,000(2)
2.50 December 2006................................................... 165,500(2) 165,500(2)
3.625 March/April 2001................................................ 24,852 24,852
4.00 July 2000....................................................... 40,000
6.00 July/August 2000................................................ 25,000 25,000 25,000
6.00 August 2001..................................................... 30,000 30,000
6.00 February/March 2002............................................. 8,934(3)
6.80 October 2000.................................................... 24,706 14,706 14,706
6.80 February/March 2001............................................. 12,500 12,500
8.77 August 2001..................................................... 2,000 2,000
---------------------------------------------------------------- --------- --------- ---------
Total........................................................... 89,706 712,058 735,684
---------------------------------------------------------------- --------- --------- ---------
---------------------------------------------------------------- --------- --------- ---------
Weighted average exercise price................................. $ 5.33 $ 2.38 $ 2.42
---------------------------------------------------------------- --------- --------- ---------
---------------------------------------------------------------- --------- --------- ---------
</TABLE>
As of December 31, 1996 and March 31, 1997 there were 401,558 and 425,184
warrants exercisable at a weighted-average exercise price of $2.40 and $2.48,
respectively.
- ------------------------
(1) Includes 107,000 shares of common stock underlying the Units issued in
conjunction with the Secured Notes.
(2) Warrants unexercisable at December 31, 1996 and March 31, 1997. Generally,
these warrants are exercisable at 25% per annum on each anniversary of the
date of grant.
(3) Warrants exercisable at the lower of $6.00 or one-half of the IPO price per
share.
[4] PROPOSED PUBLIC OFFERING:
The Company has signed a letter of intent with an underwriter with respect
to a proposed public offering of the Company's securities. There is no assurance
that such offering will be consummated. In connection therewith the Company
anticipates incurring substantial expenses which, if the offering is not
consummated, will be charged to expense.
F-14
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE I)--INCOME TAXES:
At December 31, 1996, the Company had approximately $4,340,000 of net
operating loss carryforwards for federal income tax purposes which expire
through 2011.
At December 31, 1996, the Company had a deferred tax asset of approximately
$2,070,000 representing the benefits of its net operating loss carryforwards and
certain expenses not currently deductible. The Company has provided a valuation
reserve against the full amount of its deferred tax asset since the likelihood
of realization cannot be determined. The difference between the statutory tax
rate of 34% and the Company's effective tax rate of 0% is substantially due to
the increase in the valuation allowance of $370,000 (1995) and $1,020,000
(1996), respectively.
Section 382 of the Internal Revenue Code contains provisions which may limit
the loss carryforwards available if significant changes occur in stockholder
ownership interests. These limitations will apply if the proposed public
offering is consummated. Accordingly, the Company would be subject to a
significant annual limitation on the utilization of its net operating losses.
(NOTE J)--COMMITMENTS AND OTHER MATTERS:
[1] LEASE:
The Company was obligated under a lease with a related party (see Note K[1])
for office space which was scheduled to expire in September 1999. In May 1997
the Company entered into a ten year lease for new offices and terminated its
lease with the related party. Minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997........................................................................ $ 102,000
1998........................................................................ 157,000
1999........................................................................ 163,000
2000........................................................................ 165,000
2001........................................................................ 165,000
Thereafter.................................................................. 880,000
------------
Total................................................................... $ 1,632,000
------------
------------
</TABLE>
The lease provides for escalations for increases in real estate taxes and
certain operating expenses.
Rent expense (net of sublease income) was approximately $61,000, $73,000,
$15,000 and $21,000 for the years ended December 31, 1995 and December 31, 1996
and the three months ended March 31, 1996 and March 31, 1997, respectively.
[2] EMPLOYMENT AGREEMENTS:
In March 1995, the Company entered a three year employment agreement with
the President which provides for annual base salary of $195,000 (subject to
yearly increase based on the Consumer Price Index) and bonuses at the discretion
of the Compensation Committee.
In addition, effective January 1, 1996, the Company entered into employment
agreements with two officers which provide for annual base salaries aggregating
$300,000 (subject to yearly increase based on
F-15
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE J)--COMMITMENTS AND OTHER MATTERS: (CONTINUED)
[2] EMPLOYMENT AGREEMENTS: (CONTINUED)
the Consumer Price Index and bonuses at the discretion of the Compensation
Committee) expiring on January 1, 1999.
[3] 401(K) PLAN:
The Company has a retirement savings plan for eligible full-time employees
pursuant to Section 401(k) of the Internal Revenue Code. The Company at its
discretion may make contributions up to 15% of plan participants' compensation.
The Company made no contributions to the plan for the years ended December 31,
1995 and December 31, 1996 and the three month period March 31, 1997.
[4] MAJOR CUSTOMERS--CONCENTRATION OF RISK:
Four customers accounted for the following percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------ ------------------------
CUSTOMER 1995 1996 1996 1997
- -------------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
A....................................................... 9% 60% 84%
B....................................................... 35% 22% 31%
C....................................................... 50%
D....................................................... 61%
</TABLE>
[5] ROYALTIES:
Through December 31, 1995 the Company and certain utilities were engaged in
the development of active noise and vibration control and failure diagnostic and
condition monitoring technologies. In connection therewith, these utilities
provided development funding. In some cases, as an inducement to provide funding
the Company agreed to pay royalties based on 3% of future products sold and 5%
purchase discounts which in the aggregate may provide returns of up to 200% of
the amount funded by the utilities or approximately $2.2 million.
(NOTE K)--RELATED PARTY TRANSACTIONS:
[1] The Company leased office space from a law firm of which certain
partners are directors/ stockholders of the Company (see Note J[1]). Amounts
owed to this related party aggregated approximately $146,000 and $95,000 as of
December 31, 1996 and March 31, 1997, respectively. During the year ended
December 31, 1995 the Company granted the law firm a warrant to purchase 20,000
shares of common stock at $4.00 per share, which was valued at $19,000 and
charged to operations. During the year ended December 31, 1996 the Company
cancelled the warrant granted in 1995 and granted new warrants to purchase
25,000 shares of common stock at $0.01 per share, which were valued at $85,000
and charged to operations. In January 1997, the Company issued the law firm
14,692 units each comprised of one share of common stock and a warrant to
purchase one share of common stock at $2.50 a share, to satisfy $73,000 of
$146,000 due at December 31, 1996. Accordingly, $73,000 of this liability is
classified as long-term at December 31, 1996.
F-16
<PAGE>
QUIETPOWER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997)
(NOTE K)--RELATED PARTY TRANSACTIONS: (CONTINUED)
[2] At December 31, 1996 and March 31, 1997 the advances from a stockholder
of $75,000 and $80,000, respectively, are noninterest bearing and are payable at
the earlier of the closing of an IPO or January 15, 1998.
[3] For the years ended December 31, 1995 and December 31, 1996 and the
three months ended March 31, 1997 approximately $58,000, $163,000 and $34,000,
respectively, was incurred for services provided by an investment banking firm,
of which one partner is also a director of the Company. Another director is a
principal of a firm which has an agreement whereby it will share in the fees
received by the investment banking firm from the Company. During the year ended
December 31, 1996 the Company granted the investment banking firm 60,000
warrants valued at $127,000 which were charged to operations.
In April 1997 the Company entered into an agreement with the investment
banking firm whereby the investment banking firm is to receive commissions,
based on certain percentages of proceeds obtained by the Company in connection
with certain purchase, financing and venture transactions (excluding an IPO) for
financial and investment banking services.
(NOTE L)--SUBSEQUENT EVENTS:
In April 1997, in contemplation of its proposed IPO, the Company issued
bridge notes (the "Bridge Notes") in the principal amount of $2,000,000, for
which the Company received proceeds, net of offering costs (which include
$200,000 paid to the related party referred to in Note K[3]), of approximately
$1,594,000. The Bridge Notes bear interest at 11% per annum (effective interest
rate, giving effect to the value of warrants issued therewith, 85.7%) and are
due and payable on the earlier of (a) the closing of an initial public offering
of the Company's common stock, or (b) one year after the date of execution of
the Bridge Notes.
The Bridge Notes are collateralized by all of the assets of the Company
pursuant to an agreement with the Secured Note holders whereby the Bridge Notes
are subordinate to the Secured Notes. The loan agreement, among other matters,
restricts the Company from entering into new indebtedness senior to the Bridge
Notes, paying of indebtedness subordinate to the Bridge Notes and declaring or
paying dividends. In conjunction with the issuance of the Bridge Notes, the
Company issued warrants to purchase 240,000 shares of common stock exercisable
at the lower of (i) one-half of the IPO price per share, or (ii) $3.75 per
share. The Company valued the warrants at $856,000 representing the fair value
at the date of grant and is being accounted for as debt discount.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 8
Concurrent Offering.............................. 18
Use of Proceeds.................................. 19
Dividend Policy.................................. 20
Capitalization................................... 21
Dilution......................................... 22
Selected Financial Data.......................... 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 26
Business......................................... 32
Management....................................... 47
Principal Stockholders........................... 52
Certain Transactions............................. 54
Description of Securities........................ 55
Shares Eligible for Future Sale.................. 58
Underwriting..................................... 60
Legal Matters.................................... 62
Experts.......................................... 62
Additional Information........................... 62
Index to Financial Statements.................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
QUIETPOWER SYSTEMS, INC.
2,000,000 SHARES OF COMMON STOCK
AND
2,000,000 REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
NATIONAL SECURITIES
CORPORATION
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[(ALTERNATE PAGES FOR SELLING STOCKHOLDER PROSPECTUS)]
SUBJECT TO COMPLETION, DATED JUNE 17, 1997
PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
QUIETPOWER SYSTEMS, INC.
507,500 SHARES OF COMMON STOCK
------------------
All of the 507,500 shares of Common Stock (the "Common Stock") of QuietPower
Systems, Inc. ("QuietPower" or the "Company") offered hereby are issuable upon
exercise of certain warrants (and warrants underlying certain of those warrants)
that were issued in connection with private placement financings of the Company
(the "Private Placement Warrants") and are being sold by Selling Stockholders
named herein. The Company will not receive any of the proceeds from the sale of
the shares offered hereby.
The distribution of shares of Common Stock offered hereby by the Selling
Stockholders may be effected in one or more transactions that may take place on
the over-the-counter market, including ordinary broker's transactions, privately
negotiated transactions or through sales to one or more dealers for sale of such
securities as principals, at market prices prevailing at the time of sale, at
prices relating to such prevailing market prices or at negotiated prices. Usual
and customary or specifically negotiated brokerage fees or commissions may be
paid by the Selling Stockholders.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 8 AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATES SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Selling Stockholders and intermediaries through whom such securities are
sold may be deemed "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered,
and any profits realized or commissions received may be deemed underwriting
compensation.
The Company will not receive any of the proceeds from the sale of the shares
of the Common Stock by the Selling Stockholders, although it will receive
proceeds from the exercise of the Private Placement Warrants. Expenses of this
offering, other than fees and expenses of counsel to the Selling Stockholders
and selling commissions, will be paid by the Company. See "Plan of
Distribution."
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Company of 2,000,000 shares of Common Stock
and 2,000,000 Redeemable Common Stock Purchase Warrants and up to an additional
300,000 shares of Common Stock and/or 300,000 Redeemable Common Stock Purchase
Warrants ("Warrants") to cover over-allotments, if any, was declared effective
by the Securities and Exchange Commission (the "Commission"). The Company will
receive net proceeds of approximately $12,730,000 from the sale of the
securities included in the underwritten public offering, and will receive
approximately $14,782,000 in additional net proceeds if the overallotment option
is exercised in full after payment of underwriting discounts and commissions and
estimated expenses of the underwritten public offering. See "Concurrent
Offering."
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[ALTERNATE]
THE OFFERING
<TABLE>
<S> <C>
Securities
Offered:................................... 507,500 Shares of Common Stock.
Common Stock
Outstanding:............................... 3,084,013 shares(1)
Use of Proceeds:............................. The Company intends to use the proceeds from
the exercise of the Warrants for working
capital and general corporate purposes.
Risk Factors:................................ Investment in the Common Stock offered hereby
is highly speculative and involves a high
degree of risk and immediate and substantial
dilution to the purchasers in this Offering.
See "Risk Factors" and "Dilution."
Proposed American Stock
Exchange Symbol:...........................
Common Stock................................. KWT
</TABLE>
- ------------------------
(1) Assumes the issuance of 2,000,000 shares of Common Stock to be issued in
connection with an underwritten public offering by the Company. Does not
include (i) 1,414,915 shares of Common Stock issuable upon exercise of
outstanding warrants (which number includes warrants to purchase 265,000
shares of Common Stock that will be issued upon completion of this Offering
and warrants to purchase 133,750 shares of Common Stock that are issuable
upon exercise of nominally priced warrants), with a weighted average
exercise price of $3.44 per share, (ii) 250,000 shares of Common Stock
subject to options available under the Company's 1993 Stock Option Plan (the
"1993 Plan"), of which options to purchase an aggregate of 239,490 shares of
Common Stock with a weighted average exercise price of $4.22 per share have
been granted, and options to purchase 10,510 shares of Common Stock remain
available for future grants, and (iii) 83,333 shares of Common Stock
issuable upon conversion of convertible promissory notes in the aggregate
principal amount of $625,000 (assuming an initial public offering price of
$7.50 per share of Common Stock). See "Management's Discussion and Analysis
of Financial Condition and Results of its Operations," "Use of Proceeds" and
"Management--Stock Option Plan."
5
<PAGE>
[ALTERNATE]
CONCURRENT OFFERING
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Company of 2,000,000 shares of Common Stock
and 2,000,000 Redeemable Common Stock Purchase Warrants and up to an additional
300,000 shares of Common Stock and/or 300,000 Redeemable Common Stock Purchase
Warrants to cover over-allotments, if any, was declared effective by the
Securities and Exchange Commission (the "Commission"). The Company will receive
net proceeds of approximately $12,730,000 from the sale of shares of Common
Stock included in the underwritten public offering, and will receive
approximately $14,782,000 in additional net proceeds if the over-allotment is
exercised in full after payment of underwriting discounts and commissions and
estimated expenses of the underwritten public offering.
18
<PAGE>
[ALTERNATE]
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that, depending on market
conditions and other factors, it may sell shares of Common Stock from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then-current
market price, or in negotiated transactions. The shares may be sold by one or
more of the following methods, without limitation: (a) a block trade in which a
broker or dealer so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchasers by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchases;
and (d) face to face transactions between sellers and purchaser without a broker
or dealer. In effecting sales, brokers or dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from Selling
Stockholders in amounts to be negotiated. Such brokers, dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales.
The Company will bear all costs and expenses of the registration of the
Common Stock under the Securities Act and certain state securities laws, other
than fees of counsel for the Selling Stockholders and any discounts or
commissions payable with respect to sales of such Common Stock. The Selling
Stockholders will pay any transaction costs associated with effecting any sales
that occur.
The Selling Stockholders are not restricted as to the price or prices at
which they may sell shares of Common Stock acquired upon the exercise of the
Private Placement Warrants. Such sales may have an adverse effect on the market
price of the Common Stock. Moreover, the Selling Stockholders are not restricted
a to the number of shares of Common Stock that may be sold at any one time, and
it is possible that a significant number of shares could be sold at the same
time, which also may have an adverse effect on the market price of the Common
Stock.
The shares offered hereby are subject to an agreement between the holders
thereof and the Representative, pursuant to which the Selling Stockholders have
agreed not to sell any of such shares prior to three months from the date of
this Prospectus and not to sell 133,750 of such shares prior to nine months from
the date of this Prospectus, without the prior written consent of the
Representative.
19
<PAGE>
[ALTERNATE]
SELLING STOCKHOLDERS
Pursuant to two private placement transactions consummated in May 1996 and
April 1997, respectively, the Company has issued Private Placement Warrants to
purchase an aggregate of 507,500 shares of Common Stock. 133,750 of the Private
Placement Warrants have an exercise price of $.01 per share and are to purchase
133,750 shares of Common Stock and additional Private Placement Warrants to
purchase 133,750 shares of Common Stock at an exercise price of $ per
share, and the remaining 240,000 Private Placement Warrants have an exercise
price of $ per share. Payment to the Company upon exercise of all such
Private Placement Warrants would be $ . The Company has agreed to include
the 507,500 shares in the Registration Statement of which this Prospectus is a
part.
The following table sets forth the present record and beneficial ownership
of securities by the Company owed by the Selling Stockholders as of the date of
this Prospectus.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SELLING STOCKHOLDER SECURITIES(1) PERCENTAGE AFTER OFFERING
- --------------------------------------------------------------------------- ------------ -----------------------------
<S> <C> <C>
DayStar Partners, L.P...................................................... 137,500 0
10600 DeAnza Boulevard, Suite 215
Cuperinto, CA 95014
Douglas C. Lee............................................................. 17,500 0
2100 Garden Road, Suite 306
Monterey, CA 93940
The Smith 1987 Family Trust................................................ 12,500 0
2415 South Court
Palo Alto, CA 94301
J. Thomas Bentley.......................................................... 50,000 0
171 Estates Drive
Piedmont, CA 94611
Westminster Associates, Ltd................................................ 50,000 0
Ragnall House
18 Peel Road
Douglas, Isle of Man
British Isles
QPS Bridge, LLC............................................................ 90,000 0
1330 Avenue of the Americas, 36th floor
New York, NY 10019
Anderson, Weinroth & Co., L.P.............................................. 30,000 0
1330 Avenue of the Americas, 36th Floor
New York, New York 10019
Regent Capital Partners, L.P............................................... 120,000 0
505 Park Avenue, 17th floor
New York, NY 10022
</TABLE>
- ------------------------
(1) The number of shares listed indicates both the amount of securities owned by
the holder prior to the offering and the amount to be offered for the
stockholder's account.
Each of the Selling Stockholders will be entitled to receive all of the
proceeds from the future sale of the shares of Common Stock underlying their
respective warrants. The Company will not receive any proceeds from the future
sale of any of the aforementioned shares by their respective holders.
The Selling Stockholders will bear all the expenses of any offering by them
of their shares, including the costs of their counsel and any sales commissions
incurred.
None of the above-listed Selling Stockholders have had a material
relationship with the Company within the past three years.
54
<PAGE>
[ALTERNATE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Concurrent Offering............................. 18
Plan of Distribution............................ 19
Dividend Policy................................. 20
Capitalization.................................. 21
Dilution........................................ 23
Selected Financial Data......................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 27
Business........................................ 32
Management...................................... 47
Principal Stockholders.......................... 52
Selling Stockholders............................ 54
Certain Transactions............................ 55
Description of Securities....................... 56
Shares Eligible for Future Sale................. 59
Underwriting.................................... 61
Legal Matters................................... 63
Experts......................................... 63
Additional Information.......................... 63
Index to Financial Statements................... F-1
</TABLE>
QUIETPOWER SYSTEMS, INC.
507,500 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law the registrant may
or shall, subject to various exceptions and limitations, indemnify its directors
or officers and may purchase and maintain insurance therefor.
The Company has included in its Certificate of Incorporation pursuant to
Section 102(b)(7) of the Delaware General Corporation Law a provision
eliminating the personal liability of directors to the Company or its
stockholders for damages for breach of fiduciary duty. The principal effect of
this provision in the Company's Certificate of Incorporation is to eliminate
potential monetary damage actions against any director for breach of his duties
as a director except (a) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the Delaware General Corporation Law, which relates to a willful
or negligent violation of Section 160 (regarding the illegal purchase or
redemption of stock by a corporation) or 173 (regarding a corporation's illegal
declaration or payment of dividends) of the Delaware General Corporation Law, or
(d) for any transaction from which the director derived an improper benefit.
This provision does not affect the liability of any director for acts or
omissions occurring prior to the date of adoption of this provision. In
addition, Section 145 of the Delaware General Corporation Law empowers a
corporation (a) to grant indemnification to any officer or director where it is
determined that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful and (b) to advance to an officer or director the expenses
of defending claims upon receipt of his undertaking to repay any amount to which
it is later determined he is not entitled. The Company's By-laws provide that
the Company will indemnify and advance expenses of defense to its officers and
directors substantially to the full extent authorized by the Delaware General
Corporation Law.
The foregoing statement is subject to the detailed provisions of Sections
102 and 145 of the Delaware General Corporation Law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the Company in connection with the issuance and
distribution of the securities being registered hereby are as follows:
<TABLE>
<S> <C>
Registration Fee (Securities and Exchange Commission)............. $ 19,645
Registration Fee (American Stock Exchange)........................ 42,500
NASD Filing Fee................................................... 6,984
Printing and Engraving Expenses................................... 60,000
Accounting Fees and Expenses...................................... 40,000
Legal Fees and Expenses........................................... 275,000
Transfer and Warrant Agent's Fees................................. 1,500
Blue Sky Fees and Expenses........................................ 25,000
Miscellaneous Expenses............................................ $ 23,371
---------
Total....................................................... $ 494,000
---------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1994, the Company has, through a series of private
placements, sold 186,547 shares of Common Stock, 1,325 shares of Series A
Convertible Preferred Stock, $3,473,000 of promissory notes and warrants to
purchase an aggregate of 527,167 shares of Common Stock, for an aggregate
purchase price of approximately $6,059,000*. The Company sold these securities
pursuant to Rule 506 of the Regulations promulgated under the Securities Act by
virtue of the fact that sales were made exclusively to accredited investors. The
Company did not make any offers by means of general solicitations or general
advertisements and it paid commissions in connection with four of these sales.
<TABLE>
<CAPTION>
DATE SECURITIES OFFERING PRICE PROCEEDS EXEMPTION FEES
- ----------------------- ----------------------- ----------------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
January 1994 Common Stock $2.50 per Share $ 50,000 Rule 506 $ 0
January 1994 Common Stock $3.75 per Share $ 41,000* Rule 506 $ 0
November 1994 Units--Common Stock and $8.77 per Unit
Warrants $ 853,900 Rule 506 $ 0
July 1995 Units--Common Stock and $4.00 per Unit
Warrants $ 75,000 Rule 506 $ 0
July 1995 Promissory Notes with N/A
Warrants $ 25,000 Rule 506 $ 0
October 1995 Units--Common Stock and $6.80 per Unit
Warrants $ 100,000 Rule 506 $ 0
November 1995 - January Promissory Notes with N/A
1996 Warrants $ 88,000 Rule 506 $ 0
February 1996 Units--Common Stock $6.80 per Unit
with Warrants $ 68,000 Rule 506 $ 0
April 1996 Promissory Notes with N/A
Warrants $ 25,000 Rule 506 $ 0
March--April 1996 Convertible Promissory N/A
Notes $ 175,000 Rule 506 $ 0
May 1996 Promissory Notes and N/A
Warrants $ 535,000 Rule 506 $ 41,400
December 1996 Units--Preferred Stock $1,000 per Unit
and Warrants $ 1,325,000 Rule 506 $ 127,500
January 1997 Units--Common Stock and N/A
Warrants $ 73,000* Rule 506 $ 0
January--April 1997 Promissory Notes with N/A
Warrants $ 625,000 Rule 506 $ 62,500
April 1997 Promissory Notes with N/A
Warrants $ 2,000,000 Rule 506 $ 300,000
</TABLE>
- ------------------------
* In January 1994 and January 1997, the Company satisfied $41,000 and $73,000,
respectively, of its past due balance with KAZB for rental payments and
other office services by issuing (i) in January 1994, 11,033 shares of
Common Stock, and (ii) in January 1997, units consisting of 14,692 shares of
Common Stock and warrants to purchase 14,692 shares of Common Stock.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT # DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
4.2 Form of Warrant Agreement between the Company, Continental Stock Transfer & Trust Company and
National Securities Corporation
4.3 Specimen Form of Warrant Certificate (contained in Exhibit 4.4)
4.4 Form of Representative's Warrant Agreement (including form of Warrant Certificate) between the
Company and National Securities Corporation
5. Opinion of counsel to the Company concerning the legality of the securities being offered
10.27 Conversion and Subscription Agreement between the Company and Baltimore Gas and Electric Company,
dated as of June 13, 1997
23.1 Consent of Richard A. Eisner & Company, LLP
23.2 Consent of Breslow & Walker, LLP (contained in the opinion filed as Exhibit 5.)
27. Financial Data Schedule
</TABLE>
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by final adjudication of
such issue.
The undersigned Registrant will:
(1) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing,
II-3
<PAGE>
any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on June 16, 1997.
QUIETPOWER SYSTEMS, INC.
BY: /S/ JONATHAN M. CHARRY
-----------------------------------------
Jonathan M. Charry
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
BY: /S/ ERIC W. JACOBSON
-----------------------------------------
Eric W. Jacobson
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JONATHAN M. CHARRY Director
- ------------------------------ June 16, 1997
Jonathan M. Charry
/s/ ERIC W. JACOBSON Director
- ------------------------------ June 16, 1997
Eric W. Jacobson
/s/ WILLIAM S. BERNSTEIN* Director
- ------------------------------ June 16, 1997
William S. Bernstein
Director
- ------------------------------ ,1997
Carl Horn
/s/ ALFRED B. THACHER, JR.* Director
- ------------------------------ June 16, 1997
Alfred B. Thacher, Jr.
/s/ JONATHAN M. CHARRY
----------------------------------------
Jonathan M. Charry
ATTORNEY-IN-FACT
*By: June 16, 1997
II-5
<PAGE>
Exhibit 1.1
OHS DRAFT
5/20/97
[Form of Underwriting Agreement - Subject to Additional Review]
2,000,000 Shares of Common Stock
and 2,000,000 Redeemable Warrants
QuietPower Systems, Inc.
UNDERWRITING AGREEMENT
New York, New York
, 1997
NATIONAL SECURITIES CORPORATION
As Representative of the
Several Underwriters listed on Schedule A hereto
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
QuietPower Systems, Inc., a Delaware corporation (the "Company"), confirms
its agreement with National Securities Corporation ("National") and each of the
underwriters named in Schedule A hereto (collectively, the "Underwriters," which
term shall also include any underwriter substituted as hereinafter provided in
Section 11), for whom National is acting as representative (in such capacity,
National shall hereinafter be referred to as "you" or the "Representative"),
with respect to the sale by the Company and the purchase by the Underwriters,
acting severally and not jointly, of the respective numbers of shares ("Shares")
of the Company's common stock, $.01 par value per share ("Common Stock"), and
redeemable common stock purchase warrants (the "Redeemable Warrants"), each to
purchase one share of Common Stock, set forth in Schedule A hereto. The
aggregate 2,000,000 Shares and 2,000,000 Redeemable Warrants will be separately
tradeable upon issuance and are hereinafter referred to as the "Firm
Securities." Each Redeemable Warrant is exercisable commencing on the date
<PAGE>
hereof until ____________, 2002 [60 months from the date of this Agreement],
unless previously redeemed by the Company, at an initial exercise price of
$_______ [150% of the initial public offering price] per share of Common Stock.
The Redeemable Warrants may be redeemed by the Company at a redemption price of
$.05 per Redeemable Warrant at any time after _____________, 1998 [13 months
from the date of this Agreement] on thirty (30) days' prior written notice,
provided that the average closing sale price of the Common Stock equals or
exceeds $_____________ [150% of the exercise price per Redeemable Warrant]
(subject to adjustment) for any twenty (20) trading days within a period of
thirty (30) consecutive trading days ending on the fifth (5) trading day prior
to the date of the notice of redemption, all in accordance with the terms and
conditions of the Warrant Agreement (as hereinafter defined).
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and not
jointly, up to an additional 300,000 shares of Common Stock and/or 300,000
Redeemable Warrants for the purpose of covering over-allotments, if any. Such
300,000 shares of Common Stock and 300,000 Redeemable Warrants are hereinafter
collectively to as the "Option Securities." The Company also proposes to issue
and sell to you warrants (the "Representative's Warrants") pursuant to the
Representative's Warrant Agreement (the "Representative's Warrant Agreement")
for the purchase of an additional 200,000 shares of Common Stock and/or 200,000
Redeemable Warrants. The shares of Common Stock and Redeemable Warrants issuable
upon exercise of the Representative's Warrants are hereinafter referred to as
the "Representative's Securities." The Firm Securities, the Option Securities,
the Representative's Warrants and the Representative's Securities (collectively,
hereinafter referred to as the "Securities") are more fully described in the
Registration Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the Closing Date (as hereinafter defined) and each Option
Closing Date (as hereinafter defined), if any, as follows:
a. The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and an amendment or
amendments thereto, on Form SB-2 (No. 333-_________), including any related
preliminary prospectus ("Preliminary Prospectus"), for the registration of the
Securities under the Securities Act of 1933, as amended (the "Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act, and the rules and
regulations (the "Regulations") of the Commission under the Act. The Company
will promptly file a further amendment to said registration statement in the
form heretofore delivered to the Underwriters and will not file any other
amendment thereto to which the Underwriters shall have objected in writing after
having been furnished with a copy thereof. Except as the context may otherwise
require, such registration statement, as amended, on file with the Commission at
the time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein (including, but not limited to those
documents or information incorporated by reference therein) and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430(A) of the Regulations), is hereinafter called the "Registration Statement",
and the form
- 2 -
<PAGE>
of prospectus in the form first filed with the Commission pursuant to Rule
424(b) of the Regulations, is hereinafter called the "Prospectus." For purposes
hereof, "Rules and Regulations" mean the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable.
b. Neither the Commission nor any state regulatory authority has issued
any order preventing or suspending the use of any Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened. Each of the Preliminary Prospectus, the Registration Statement
and Prospectus at the time of filing thereof conformed with the requirements of
the Act and the Rules and Regulations, and none of the Preliminary Prospectus,
the Registration Statement or Prospectus at the time of filing thereof contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriters by or on behalf of the Underwriters
expressly for use in such Preliminary Prospectus, Registration Statement or
Prospectus or any amendment thereof or supplement thereto.
c. When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date (as defined herein) and each Option
Closing Date (as defined herein), if any, and during such longer period as the
Prospectus may be required to be delivered in connection with sales by the
Underwriters or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and will conform to the requirements
of the Act and the Rules and Regulations; neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in strict conformity with information
furnished to the Company in writing by or on behalf of any Underwriter expressly
for use in the Preliminary Prospectus, Registration Statement or Prospectus or
any amendment thereof or supplement thereto.
d. The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its incorporation.
Except as set forth in the Prospectus, the Company does not own an interest in
any corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such qualification or
licensing. The Company has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without limitation,
those having jurisdiction over environmental or similar matters), domestic or
foreign, to own or lease
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its properties and conduct its business as described in the Prospectus; the
Company is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all applicable federal, state, local and foreign laws, rules and
regulations; and the Company has not received any notice of proceedings relating
to the revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
position, prospects, value, operation, properties, business or results of
operations of the Company. The disclosures in the Registration Statement
concerning the effects of federal, state, local, and foreign laws, rules and
regulations on the Company's business as currently conducted and as contemplated
are correct in all material respects and do not omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading in light of the circumstances under which they were made.
e. The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "CAPITALIZATION" and
"DESCRIPTION OF SECURITIES" and will have the adjusted capitalization set forth
therein on the Closing Date and each Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Warrant Agreement, the Representative's Warrant Agreement and as described
in the Prospectus. The Securities and all other securities issued or issuable by
the Company conform or, when issued and paid for, will conform, in all respects
to all statements with respect thereto contained in the Registration Statement
and the Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and non-assessable
and the holders thereof have no rights of rescission with respect thereto, and
are not subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of any
holders of any security of the Company or similar contractual rights granted by
the Company. The Securities are not and will not be subject to any preemptive or
other similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable and will conform to the
description thereof contained in the Prospectus; the holders thereof will not be
subject to any liability solely as such holders; all corporate action required
to be taken for the authorization, issue and sale of the Securities has been
duly and validly taken; and the certificates representing the Securities will be
in due and proper form. Upon the issuance and delivery pursuant to the terms
hereof of the Securities to be sold by the Company hereunder, the Underwriters
or the Representative, as the case may be, will acquire good and marketable
title to such Securities free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any kind
whatsoever.
f. The financial statements of the Company, together with the related
notes and schedules thereto, included in the Registration Statement, each
Preliminary Prospectus and the Prospectus fairly present the financial position,
income, changes in cash flow, changes in stockholders' equity and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply and such financial statements have been prepared in
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conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved and such
financial statements as are audited have been examined by Richard A. Eisner &
Company, LLP, who are independent certified public accountants within the
meaning of the Act and the Rules and Regulations, as indicated in their report
filed therewith. There has been no adverse change or development involving a
prospective adverse change in the condition, financial or otherwise, or in the
earnings, position, prospects, value, operation, properties, business, or
results of operations of the Company, whether or not arising in the ordinary
course of business, since the date of the financial statements included in the
Registration Statement and the Prospectus and the outstanding debt, the
property, both tangible and intangible, and the business of the Company, conform
in all material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. Financial information (including,
without limitation, any pro forma financial information) set forth in the
Prospectus under the headings "SUMMARY FINANCIAL DATA", "CAPITALIZATION,"
"SELECTED FINANCIAL DATA," and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATION," fairly present, on the basis stated
in the Prospectus, the information set forth therein, and have been derived from
or compiled on a basis consistent with that of the audited financial statements
included in the Prospectus; and, in the case of pro forma financial information,
if any, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions and
circumstances referred to therein. The amounts shown as accrued for current and
deferred income and other taxes in such financial statements are sufficient for
the payment of all accrued and unpaid federal, state, local and foreign income
taxes, interest, penalties, assessments or deficiencies applicable to the
Company, whether disputed or not, for the applicable period then ended and
periods prior thereto; adequate allowance for doubtful accounts has been
provided for unindemnified losses due to the operations of the Company; and the
statements of income do not contain any items of special or nonrecurring income
not earned in the ordinary course of business, except as specified in the notes
thereto.
g. The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable, including, but not limited to, withholding taxes
and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of
1986, as amended (the "Code"), and has furnished all information returns it is
required to furnish pursuant to the Code, (ii) has established adequate reserves
for such taxes which are not due and payable, and (iii) does not have any tax
deficiency or claims outstanding, proposed or assessed against it.
h. No transfer tax, stamp duty or other similar tax is payable by or on
behalf of the Underwriters in connection with (i) the issuance by the Company of
the Securities, (ii) the purchase by the Underwriters of the Firm Securities and
the Option Securities from the Company and the purchase by the Representative of
the Representative's Warrants from the Company, (iii) the consummation by the
Company of any of its obligations under this Agreement, or (iv) resales of the
Firm Securities and the Option Securities in connection with the distribution
contemplated hereby.
i. The Company maintains insurance policies, including, but not
limited to, general liability, product and property insurance, which insures the
Company and its employees, against
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such losses and risks generally insured against by comparable businesses. The
Company (A) has not failed to give notice or present any insurance claim with
respect to any matter, including but not limited to the Company's business,
property or employees, under any insurance policy or surety bond in a due and
timely manner, (B) does not have any disputes or claims against any underwriter
of such insurance policies or surety bonds or has failed to pay any premiums due
and payable thereunder, or (C) has not failed to comply with all conditions
contained in such insurance policies and surety bonds. There are no facts or
circumstances under any such insurance policy or surety bond which would relieve
any insurer of its obligation to satisfy in full any valid claim of the Company.
j. There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of, the Company
which (i) questions the validity of the capital stock of the Company, this
Agreement, the Warrant Agreement or the Representative's Warrant Agreement, or
of any action taken or to be taken by the Company pursuant to or in connection
with this Agreement, the Warrant Agreement or the Representative's Warrant
Agreement, (ii) is required to be disclosed in the Registration Statement which
is not so disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), or (iii) might
materially and adversely affect the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company.
k. The Company has full legal right, power and authority to authorize,
issue, deliver and sell the Securities, enter into this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement and to consummate the
transactions provided for in this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement; and this Agreement, the Warrant Agreement
and the Representative's Warrant Agreement have each been duly and properly
authorized, executed and delivered by the Company. Each of this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement constitutes a
legal, valid and binding agreement of the Company enforceable against the
Company in accordance with its terms, and none of the Company's issue and sale
of the Securities, execution or delivery of this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement, its performance hereunder
and thereunder, its consummation of the transactions contemplated herein and
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of (i) the certificate of
incorporation or by-laws of the Company, (ii) any license, contract, collective
bargaining agreement, indenture, mortgage, deed of trust, lease, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or by which the Company
is or may be bound or to which any of its respective properties or assets
(tangible or intangible) is or may be subject, or any
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indebtedness, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any of its
respective activities or properties.
l. No consent, approval, authorization or order of, and no filing with,
any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement,
the Warrant Agreement and the Representative's Warrant Agreement and the
transactions contemplated hereby and thereby, including without limitation, any
waiver of any preemptive, first refusal or other rights that any entity or
person may have for the issue and/or sale of any of the Securities, except such
as have been or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters' purchase and
distribution of the Firm Securities and the Option Securities, and the
Representative's Warrants to be sold by the Company hereunder.
m. All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which any of its respective assets, properties or business may be
subject have been duly and validly authorized, executed and delivered by the
Company and constitute the legal, valid and binding agreements of the Company
enforceable against the Company in accordance with its terms. The descriptions
in the Registration Statement of agreements, contracts and other documents are
accurate and fairly present the information required to be shown with respect
thereto by Form SB-2, and there are no contracts or other documents which are
required by the Act to be described in the Registration Statement or filed as
exhibits to the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and correct copies
of the documents of which they purport to be copies.
n. Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any change in the capital stock, or any change in the debt (long or
short term) or liabilities or material adverse change in or affecting the
general affairs, management, financial operations, stockholders' equity or
results of operations of the Company.
o. No default exists in the due performance and observance of any term,
covenant or condition of any license, contract, collective bargaining agreement,
indenture, mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders agreement, partnership agreement, note, loan or
credit agreement, purchase order, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement
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or instrument to which the Company is a party or by which the Company may be
bound or to which the property or assets (tangible or intangible) of the Company
is subject or affected.
p. The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and is in compliance with all federal, state,
local, and foreign laws and regulations respecting employment and employment
practices, terms and conditions of employment and wages and hours. There are no
pending investigations involving the Company by the U.S. Department of Labor, or
any other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board, or any comparable foreign agency, or any lockout, strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving the Company, or any predecessor entity, and none has ever occurred.
No representation question exists respecting the employees of the Company, and
no collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists, or, is imminent.
q. The Company does not maintain, sponsor or contribute to any program
or arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan," or a "multiemployer plan" as such terms are defined in Sections
3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain
or contribute, now or at any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code, which could subject the
Company to any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all reporting,
disclosure and other requirements of the Code and ERISA as they relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply with
Code Section 401(a), stating that such ERISA Plan and the attendant trust are
qualified thereunder. The Company has never completely or partially withdrawn
from a "multiemployer plan."
r. Neither the Company nor any of its respective employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
s. Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company, are in dispute so far as known by the Company or are in any
conflict with the right of any other person or entity. The Company (i) owns or
has the right to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all patents,
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trademarks, service marks, trade names and copyrights, technology and licenses
and rights with respect to the foregoing, used in the conduct of its business as
now conducted or proposed to be conducted without infringing upon or otherwise
acting adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing and (ii) is not
obligated or under any liability whatsoever to make any payment by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant to,
any patent, trademark, service mark, trade name, copyright, know-how, technology
or other intangible asset, with respect to the use thereof or in connection with
the conduct of its business or otherwise.
t. The Company owns and has the unrestricted right to use all trade
secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") that are material
to the development, manufacture, operation and sale of all products and services
sold or proposed to be sold by the Company, free and clear of and without
violating any right, lien, or claim of others, including without limitation,
former employers of its employees; provided, however, that the possibility
exists that other persons or entities, completely independently of the Company,
or any of its respective employees or agents, could have developed trade secrets
or items of technical information similar or identical to those of the Company.
The Company is not aware of any such development of similar or identical trade
secrets or technical information by others.
u. The Company has taken reasonable security measures to protect the
secrecy, confidentiality and value of its intellectual property in all material
respects.
v. The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
w. Richard A. Eisner & Company, LLP, whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
x. The Company has caused to be duly executed legally binding and
enforceable agreements ("Lock-up Agreements") pursuant to which the Company,
each of the Company's officers and directors, and any person or entity who
beneficially owns, as of the effective date of the Registration Statement, 1% or
more of the securities of the Company has agreed for a period of thirteen (13)
months following the effective date of the Registration Statement (i) not to,
directly or indirectly, issue, offer, agree or offer to sell, sell, grant an
option for the purchase or sale of, transfer, pledge, assign, hypothecate,
distribute or otherwise encumber or dispose of any shares of Common Stock or
options, rights, warrants or other securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for shares of
Common Stock (whether or not beneficially owned by any such holder), or any
beneficial interest therein without the prior written consent of the
Representative and (ii)
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to waive all rights to request or demand the registration pursuant to the Act of
any securities of the Company which are registered in the name of or
beneficially owned by any such holder. In addition, none of the Company or any
present or future subsidiaries or affiliates shall sell or offer for sale any of
their securities for a period of thirteen (13) months commencing on the
effective date of the Registration Statement, except for the issuance of shares
of Common Stock upon the exercise of options and warrants existing on the date
hereof and disclosed in the Prospectus, without the prior written consent of the
Representative. The Company will cause the Transfer Agent (as hereinafter
defined) to mark an appropriate legend on the face of stock certificates
representing all of such securities and to place "stop transfer" orders on the
Company's stock ledgers.
y. There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, or any of its respective officers, directors,
stockholders, partners, employees or affiliates, that may affect the
Underwriters' compensation, as determined by the National Association of
Securities Dealers, Inc. ("NASD").
z. The Common Stock has been approved for listing on the American Stock
Exchange ("AMEX").
aa. Neither the Company, nor any of its respective officers, employees,
agents or any other person acting on behalf of the Company has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any governmental agency (domestic or foreign) or instrumentality
of any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (a) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (b) if
not given in the past, might have had a material adverse effect on the assets,
business or operations of the Company, or (c) if not continued in the future,
might adversely affect the assets, business, condition, financial or otherwise,
earnings, position, properties, value, operations or prospects of the Company.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
bb. Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company, or (B) purchases from or sells or furnishes to the
Company any goods or services, or (ii) a beneficiary interest in any contract or
agreement to which the Company is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under
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"Certain Transactions," there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, and any officer,
director, or 5% or greater securityholder of the Company, or any partner,
affiliate or associate of any of the foregoing persons or entities.
cc. Any certificate signed by any officer of the Company, and delivered
to the Underwriters or to Underwriters' Counsel (as defined herein) shall be
deemed a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
dd. The minute books of the Company have been made available to the
Underwriters and contain a complete summary of all meetings and actions of the
directors (including committees thereof) and stockholders of the Company, since
the time of its incorporation, and reflect all transactions referred to in such
minutes accurately in all material respects.
ee. Except and to the extent described in the Prospectus, no holders of
any securities of the Company or of any options, warrants or other convertible
or exchangeable securities of the Company have the right to include any
securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
ff. The Company has as of the effective date of the Registration
Statement (i) entered into an employment agreement with Jonathan Charry in the
form filed as Exhibit 10.3 to the Registration Statement and (ii) purchased term
key person life insurance on the life of Mr. Charry in the amount of one million
dollars ($1,000,000), which policy names the Company as the sole beneficiary
thereof.
gg. As of the date hereof, the Company does not have more than
________________ shares of Common Stock issued and outstanding (including
securities with equivalent rights as the Common Stock and shares of Common
Stock, or such equivalent securities at prices not less than the higher of the
market value of the shares at the date of the grant or the offering price per
share).
hh. The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act
Relating to Disclosure of Doing Business with Cuba, and the Company further
agrees that if it or any affiliate commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's,
or any affiliate's, business with Cuba or with any person or affiliate located
in Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to the
Department.
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ii. The Company is not, and upon the issuance and sale of the
Securities as herein contemplated and the application of the net proceeds
therefrom as described in the Prospectus under the caption "Use of Proceeds"
will not be, an "investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of 1940, as
amended (the "1940 Act").
jj. The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
kk. The Company has entered into a warrant agreement substantially in
the form filed as Exhibit ______ to the Registration Statement (the "Warrant
Agreement") with the Representative and Continental Stock Transfer & Trust Co.,
as Warrant Agent, in form and substance satisfactory to the Representative, with
respect to the Redeemable Warrants.
2. Purchase, Sale and Delivery of the Securities.
a. On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$_______ [90% of the initial public offering price] per Share and $_______ [90%
of the initial public offering price] per Redeemable Warrant, that number of
Firm Securities set forth in Schedule A opposite the name of such Underwriter,
subject to such adjustment as the Representative in its sole discretion shall
make to eliminate any sales or purchases of fractional shares, plus any
additional number of Firm Securities which such Underwriter may become obligated
to purchase pursuant to the provisions of Section 11 hereof.
b. In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 300,000 shares of Common Stock at a price of $ ____ [90% of the
initial public offering price] per share of Common Stock and/or an additional
300,000 Redeemable Warrants at a price of $______ [90% of the initial public
offering price] per Redeemable Warrant. The option granted hereby will expire
forty-five (45) days after (i) the date the Registration Statement becomes
effective, if the Company has elected not to rely on Rule 430A under the Rules
and Regulations, or (ii) the date of this Agreement if the Company has elected
to rely upon Rule 430A under the Rules and Regulations, and may be exercised in
whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Firm Securities upon notice by the Representative to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
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delivery for any such Option Securities. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representative, but shall not
be later than three (3) full business days after the exercise of said option,
nor in any event prior to the Closing Date, as hereinafter defined, unless
otherwise agreed upon by the Representative and the Company. Nothing herein
contained shall obligate the Underwriters to make any over-allotments. No Option
Securities shall be delivered unless the Firm Securities shall be simultaneously
delivered or shall theretofore have been delivered as herein provided.
c. Payment of the purchase price for, and delivery of certificates for,
the Firm Securities shall be made at the offices of the Representative at 1001
Fourth Avenue, Suite 2200, Seattle, Washington 98154, or at such other place as
shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on ________, 1997 or at
such other time and date as shall be agreed upon by the Representative and the
Company, but not less than three (3) nor more than five (5) full business days
after the effective date of the Registration Statement (such time and date of
payment and delivery being herein called the "Closing Date"). In addition, in
the event that any or all of the Option Securities are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates
for, such Option Securities shall be made at the above-mentioned office of the
Representative or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Firm Securities and the Option Securities, if any, shall be made to the
Underwriters against payment by the Underwriters, severally and not jointly, of
the purchase price for the Firm Securities and the Option Securities, if any, to
the order of the Company for the Firm Securities and the Option Securities, if
any, by New York Clearing House funds. In the event such option is exercised,
each of the Underwriters, acting severally and not jointly, shall purchase that
proportion of the total number of Option Securities then being purchased which
the number of Firm Securities set forth in Schedule A hereto opposite the name
of such Underwriter bears to the total number of Firm Securities, subject in
each case to such adjustments as the Representative in its discretion shall make
to eliminate any sales or purchases of fractional shares. Certificates for the
Firm Securities and the Option Securities, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two (2) business days prior to the Closing Date or the relevant
Option Closing Date, as the case may be. The certificates for the Firm
Securities and the Option Securities, if any, shall be made available to the
Representative at such office or such other place as the Representative may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to the Closing Date or the relevant Option Closing Date,
as the case may be.
d. On the Closing Date, the Company shall issue and sell to the
Representative Representative's Warrants at a purchase price of $.0001 per
warrant, which Representative's Warrants shall entitle the holders thereof to
purchase an aggregate of 200,000 shares of Common Stock and/or 200,000
Redeemable Warrants. The Representative's Warrants shall be exercisable for a
period of four (4) years commencing one (1) year from the effective date of the
Registration Statement at a price equaling one hundred twenty percent (120%) of
the respective initial public offering price of the Shares and the Redeemable
Warrants. The Representative's
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Warrant Agreement and form of Warrant Certificate shall be substantially in the
form filed as Exhibit ____ to the Registration Statement. Payment for the
Representative's Warrants shall be made on the Closing Date.
3. Public Offering of the Shares and Redeemable Warrants. As soon after the
Registration Statement becomes effective as the Representative deems advisable,
the Underwriters shall make a public offering of the Shares and Redeemable
Warrants (other than to residents of or in any jurisdiction in which
qualification of the Shares and Redeemable Warrants is required and has not
become effective) at the price and upon the other terms set forth in the
Prospectus. The Representative may from time to time increase or decrease the
respective public offering price after distribution of the Shares and Redeemable
Warrants has been completed to such extent as the Representative, in its sole
discretion deems advisable. The Underwriters may enter into one or more
agreements as the Underwriters, in each of their sole discretion, deem advisable
with one or more broker-dealers who shall act as dealers in connection with such
public offering.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with each of the Underwriters as follows:
a. The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Shares and Redeemable Warrants by
the Underwriters of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Rules and Regulations.
b. As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Representative and confirm the notice in writing (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective; (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose; (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose; (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission shall enter a stop order or
suspend such qualification at any time, the Company will make every effort to
obtain promptly the lifting of such order.
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c. The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifth business day after the effective date of the
Registration Statement.
d. The Company will give the Representative notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such prospectus to which the
Representative or Orrick, Herrington & Sutcliffe LLP ("Underwriters' Counsel")
shall object.
e. The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
f. During the time when a prospectus is required to be delivered under
the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities is required to be delivered under the Act, any event shall
have occurred as a result of which, in the opinion of counsel for the Company or
Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representative promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section 10
of the Act, each such amendment or supplement
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to be satisfactory to Underwriters' Counsel, and the Company will furnish to the
Underwriters copies of such amendment or supplement as soon as available and in
such quantities as the Underwriters may request.
g. As soon as practicable, but in any event not later than forty-five
(45) days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (ninety (90) days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least twelve (12) consecutive months after the effective
date of the Registration Statement.
h. During a period of seven (7) years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
i. concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the
form furnished to the Company's stockholders and certified by the Company's
principal financial or accounting officer;
ii. concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity,
and cash flows of the Company for such fiscal year, accompanied by a copy
of the certificate thereon of independent certified public accountants;
iii. as soon as they are available, copies of all reports (financial
or other) mailed to stockholders;
iv. as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, the NASD or any
securities exchange;
v. every press release and every material news item or article of
interest to the financial community in respect of the Company, or its
affairs, which was released or prepared by or on behalf of the Company; and
vi. any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representative may request.
During such seven-year period, if the Company has an active subsidiary, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the
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Company and its subsidiary(ies) are consolidated, and will be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
i. The Company will maintain a transfer agent and warrant agent
("Transfer Agent") and, if necessary under the jurisdiction of incorporation of
the Company, a Registrar (which may be the same entity as the Transfer Agent)
for its Common Stock and Redeemable Warrants.
j. The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
k. On or before the effective date of the Registration Statement, the
Company shall provide the Representative with true original copies of duly
executed, legally binding and enforceable Lock-up Agreements pursuant to which,
for a period of thirteen (13) months from the effective date of the Registration
Statement, the Company, each of the Company's officers and directors, and any
person or entity who beneficially owns, as of the effective date of the
Registration Statement, 1% or more of the securities of the Company has agreed
(i) not to, directly or indirectly, issue, offer, agree or offer to sell, sell,
grant an option for the purchase or sale of, transfer, pledge, assign,
hypothecate, distribute or otherwise encumber or dispose of any shares of Common
Stock or options, rights, warrants or other securities convertible into,
exercisable or exchangeable for or evidencing any right to purchase or subscribe
for shares of Common Stock (whether or not beneficially owned by any such
holder), or any beneficial interest therein without the prior written consent of
the Representative, and (ii) to waive all rights to request or demand the
registration pursuant to the Act of any securities of the Company which are
registered in the name of or beneficially owned by any such holder. During the
thirteen (13) month period commencing with the effective date of the
Registration Statement, none of the Company or any present or future
subsidiaries or affiliates shall sell or offer for sale any of their securities,
except pursuant to options and warrants existing on the date hereof and
disclosed in the Prospectus, without the prior written consent of the
Representative. On or before the Closing Date, the Company shall deliver
instructions to the Transfer Agent authorizing it to place appropriate legends
on the certificates representing all of the securities subject to the Lock-up
Agreements and to place appropriate "stop transfer" orders on the Company's
stock ledgers.
l. Neither the Company, nor any of its respective officers, directors,
stockholders, nor any of its affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any securities of the Company.
m. The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No
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<PAGE>
portion of the net proceeds will be used, directly or indirectly, to acquire any
securities issued by the Company.
n. The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
o. The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Prospectus) which have been read by the Company's
independent public accountants, as stated in their letters to be furnished
pursuant to Sections 6(k) and 6(l) hereof.
p. The Company shall cause the Common Stock and Redeemable Warrants to
be listed on AMEX and, for a period of seven (7) years from the date hereof, use
its best efforts to maintain the AMEX listing of the Common Stock and the
Redeemable Warrants to the extent outstanding.
q. For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representative at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Common Stock and Redeemable
Warrants (ii) the list of holders of all of the Company's securities and (iii) a
Blue Sky "Trading Survey" for secondary sales of the Company's securities
prepared by counsel to the Company.
r. As soon as practicable, (i) but in no event more than five (5)
business days before the effective date of the Registration Statement, file a
Form 8-A with the Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than thirty (30) days after
the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and Moody's OTC Manual and to continue such inclusion for a period
of not less than seven (7) years.
s. The Company hereby agrees that it will not, for a period of eighteen
(18) months from the effective date of the Registration Statement, adopt,
propose to adopt or otherwise permit to exist any employee, officer, director,
consultant or compensation plan or similar arrangement permitting (i) the grant,
issue, sale or entry into any agreement to grant, issue or sell any option,
warrant or other contract right (x) at an exercise price that is less than the
greater of the public offering price of the Shares set forth herein and the fair
market value on the date of grant or sale or (y) to any of its executive
officers or directors or to any holder of 5% or more of the Common Stock, except
as provided in subsection (ii) of this subparagraph; (ii) the maximum number of
shares of Common Stock or other securities of the Company purchasable at any
time pursuant to options or warrants issued by the Company to exceed the
aggregate ________ shares reserved for future issuance under the Company's Stock
Option Plan
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<PAGE>
described in "Management-Stock Option Plan" section of the Prospectus; (iii) the
payment for such securities with any form of consideration other than cash; or
(iv) the existence of stock appreciation rights, phantom options or similar
arrangements.
t. Until the completion of the distribution of the Securities, the
Company shall not, without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
u. For a period equal to the lesser of (i) seven (7) years from the
date hereof, and (ii) the sale to the public of the Representative's Securities,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form SB-2 (or other appropriate form) for the registration
under the Act of the Representative's Securities. The Company further agrees to
use its best efforts to file such post-effective amendments to the Registration
Statement, as may be necessary, in order to maintain its effectiveness and to
keep such Registration Statement effective while any of the Redeemable Warrants
or Representative's Warrants remain outstanding.
v. For a period of five (5) years after the effective date of the
Registration Statement, the Company hereby agrees that the Representative shall
have the right to designate for election one (1) individual to the Company's
Board of Directors. In the event the Representative elects not to exercise the
right as set forth in this paragraph, then it may designate one person to attend
all meetings of the Board of Directors of the Company (the "Board"), which
person shall be entitled to all fees, payments, expense reimbursements and other
rights and privileges generally accorded to the other members of the Board. The
Company shall send to the Representative's designee all notices and other
correspondence and communications sent by the Company to members of the Board.
w. Commencing one year from the date hereof, if the Company engages the
Representative as a warrant solicitation agent under the terms of the Warrant
Agreement, the Company shall pay the Representative a commission equal to five
percent (5%) of the exercise price of the Redeemable Warrants, payable on the
date of the exercise thereof on the terms provided in the Warrant
Agreement;provided, however, the Representative shall be entitled to receive the
commission contemplated by this Section 4(w) only if: (i) the Representative has
provided actual services in connection with the solicitation of the exercise of
a Redeemable Warrant by a Warrantholder and (ii) the Warrantholder exercising a
Redeemable Warrant affirmatively designates in writing on the exercise form on
the reverse side of the Redeemable Warrant Certificate that the exercise of such
Warrantholder's Redeemable Warrant was solicited by the Representative.
5. Payment of Expenses.
a. The Company hereby agrees to pay on each of the Closing Date and each
Option Closing Date, if any (to the extent not paid at the Closing Date), all
expenses and fees (other
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than fees of Underwriters' Counsel, except as provided in (iv) below) incident
to the performance of the obligations of the Company under this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing (including mailing and handling charges),
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Warrant Agreement, the
Representative's Warrant Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreements, and related documents, including the cost of all
copies thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriters and such
dealers as the Underwriters may request, in quantities as hereinabove stated,
(iii) the printing, engraving, issuance and delivery of the Securities
including, but not limited to, (x) the purchase by the Underwriters of the Firm
Securities and the Option Securities and the purchase by the Representative of
the Representative's Warrants from the Company, (y) the consummation by the
Company of any of its obligations under this Agreement, the Warrant Agreement
and the Representative's Warrant Agreement, and (z) resale of the Firm
Securities and the Option Securities by the Underwriters in connection with the
distribution contemplated hereby, (iv) the qualification of the Securities under
state or foreign securities or "Blue Sky" laws and determination of the status
of such securities under legal investment laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum", the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith; (v) advertising costs and expenses,
including but not limited to costs and expenses in connection with the "road
show", information meetings and presentations, bound volumes and prospectus
memorabilia and "tomb-stone" advertisement expenses; (vi) costs and expenses in
connection with due diligence investigations, including but not limited to the
fees of any independent counsel, expert or consultant retained, (vii) fees and
expenses of the Transfer Agent and registrar and all issue and transfer taxes,
if any, (viii) applications for assignment of a rating of the Securities by
qualified rating agencies, (ix) the fees payable to the Commission and the NASD,
and (x) the fees and expenses incurred in connection with the listing of the
Securities on AMEX and any other exchange. It is agreed that the services to be
provided under clause (iv) of the foregoing sentence shall be performed by
Underwriters' Counsel.
b. If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 or Section 12, the Company shall reimburse and
indemnify the Underwriters for all of their actual out-of-pocket expenses,
including the fees and disbursements of Underwriters' Counsel, less any amounts
already paid pursuant to Section 5(c) hereof.
c. The Company further agrees that, in addition to the expenses payable
pursuant to subsection (a) of this Section 5, it will pay to the Representative
on the Closing Date by certified or bank cashier's check or, at the election of
the Representative, by deduction from the proceeds of the offering contemplated
herein, a non-accountable expense allowance equal to three percent (3%) of the
gross proceeds received by the Company from the sale of the Firm Securities,
$50,000 of which has been paid to date. In the event the Representative elects
to exercise the over-allotment option described in Section 2(b) hereof, the
Company agrees to pay to the
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Representative on each Option Closing Date (by certified or bank cashier's check
or, at the Representative's election, by deduction from the proceeds of the
offering) a non-accountable expense allowance equal to three percent (3%) of the
gross proceeds received by the Company from the sale of the Option Securities.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
a. The Registration Statement shall have become effective not later
than 12:00 P.M., New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representative, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and Redeemable
Warrants and any price-related information previously omitted from the effective
Registration Statement pursuant to such Rule 430A shall have been transmitted to
the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period and, prior to the Closing Date, the Company
shall have provided evidence satisfactory to the Representative of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
b. The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, or any supplement thereto, contains an untrue statement of fact
which, in the Representative's opinion, is material, or omits to state a fact
which, in the Representative's opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
c. On or prior to each of the Closing Date and each Option Closing
Date, if any, the Representative shall have received from Underwriters' Counsel,
such opinion or opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
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d. At the Closing Date, the Underwriters shall have received the
favorable opinion of Breslow & Walker, LLP, counsel to the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
i. The Company (A) has been duly organized and is validly existing as
a corporation in good standing under the laws of its jurisdiction, (B) is
duly qualified and licensed and in good standing as a foreign corporation
in each jurisdiction in which its ownership or leasing of any properties or
the character of its operations requires such qualification or licensing,
and (C) has all requisite corporate power and authority, and has obtained
any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or
regulatory officials and bodies (including, without limitation, those
having jurisdiction over environmental or similar matters), to own or lease
its properties and conduct its business as described in the Prospectus; the
Company is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal, state, local and foreign laws, rules and
regulations; and, the Company has not received any notice of proceedings
relating to the revocation or modification of any such authorization,
approval, order, license, certificate, franchise, or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially adversely affect the business, operations,
condition, financial or otherwise, or the earnings, business affairs,
position, prospects, value, operation, properties or results of operations
of the Company. The disclosures in the Registration Statement concerning
the effects of federal, state, local and foreign laws, rules and
regulations on the Company's business as currently conducted and as
contemplated are correct in all material respects and do not omit to state
a fact required to be stated therein or necessary to make the statements
contained therein not misleading in light of the circumstances in which
they were made.
ii. the Company does not own an interest in any other corporation,
partnership, joint venture, trust or other business entity;
iii. the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "CAPITALIZATION", and the Company is not a party
to or bound by any instrument, agreement or other arrangement providing for
it to issue, sell, transfer, purchase or redeem any capital stock, rights,
warrants, options or other securities, except for this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement and as
described in the Prospectus. The Securities and all other securities issued
or issuable by the Company conform in all material respects to all
statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the Company or any
similar rights granted by the Company. The Securities to be sold by the
Company hereunder and under the Warrant Agreement and the Representative's
Warrant Agreement are not and will not be subject to any preemptive or
other similar
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<PAGE>
rights of any stockholder, have been duly authorized and, when issued, paid
for and delivered in accordance with the terms hereof, will be validly
issued, fully paid and non-assessable and conform to the description
thereof contained in the Prospectus; the holders thereof will not be
subject to any liability solely as such holders; all corporate action
required to be taken for the authorization, issue and sale of the
Securities has been duly and validly taken; and the certificates
representing the Securities are in due and proper form. The
Representative's Warrants and the Redeemable Warrants constitute valid and
binding obligations of the Company to issue and sell, upon exercise thereof
and payment therefor, the number and type of securities of the Company
called for thereby. Upon the issuance and delivery pursuant to this
Agreement of the Firm Securities and the Option Securities and the
Representative's Warrants to be sold by the Company, the Underwriters and
the Representative, respectively, will acquire good and marketable title to
the Firm Securities and the Option Securities and the Representative's
Warrants free and clear of any pledge, lien, charge, claim, encumbrance,
pledge, security interest, or other restriction or equity of any kind
whatsoever. No transfer tax is payable by or on behalf of the Underwriters
in connection with (A) the issuance by the Company of the Securities, (B)
the purchase by the Underwriters and the Representative of the Firm
Securities and the Option Securities and the Representative's Warrants,
respectively, from the Company, (C) the consummation by the Company of any
of its obligations under this Agreement, the Warrant Agreement or the
Representative's Warrant Agreement, or (D) resales of the Firm Securities
and the Option Securities in connection with the distribution contemplated
hereby.
iv. the Registration Statement is effective under the Act, and, if
applicable, filing of all pricing information has been timely made in the
appropriate form under Rule 430A, and no stop order suspending the use of
the Preliminary Prospectus, the Registration Statement or Prospectus or any
part of any thereof or suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or, to the best of such counsel's knowledge,
threatened or contemplated under the Act;
v. each of the Preliminary Prospectus, the Registration Statement, and
the Prospectus and any amendments or supplements thereto (other than the
financial statements and other financial and statistical data included
therein, as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Rules and
Regulations.
vi. to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement (or required to be filed under the Exchange Act if
upon such filing they would be incorporated, in whole or in part, by
reference therein) and the Prospectus and filed as exhibits thereto, and
the exhibits which have been filed are correct copies of the documents of
which they purport to be copies; (B) the descriptions in the Registration
Statement and the Prospectus and any supplement or amendment thereto of
contracts and other documents to which the Company is a party or by which
it is
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<PAGE>
bound, including any document to which the Company is a party or by which
it is bound, incorporated by reference into the Prospectus and any
supplement or amendment thereto, are accurate and fairly represent the
information required to be shown by Form S-1; (C) there is no action,
arbitration, suit, proceeding, inquiry, investigation, litigation,
governmental or other proceeding (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that may give rise
to the same), or involving the properties or business of the Company which
(x) is required to be disclosed in the Registration Statement which is not
so disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all respects), (y) questions the
validity of the capital stock of the Company or this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement, or of any action taken
or to be taken by the Company pursuant to or in connection with any of the
foregoing; (D) no statute or regulation or legal or governmental proceeding
required to be described in the Prospectus is not described as required;
and (E) there is no action, suit or proceeding pending, or threatened,
against or affecting the Company before any court or arbitrator or
governmental body, agency or official (or any basis thereof known to such
counsel) in which there is a reasonable possibility of a decision which may
result in a material adverse change in the condition, financial or
otherwise, or the earnings, position, prospects, stockholders' equity,
value, operation, properties, business or results of operations of the
Company, which could adversely affect the present or prospective ability of
the Company to perform its obligations under this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement or which in any manner
draws into question the validity or enforceability of this Agreement, the
Warrant Agreement or the Representative's Warrant Agreement;
vii. the Company has full legal right, power and authority to enter
into each of this Agreement, the Warrant Agreement and the Representative's
Warrant Agreement, and to consummate the transactions provided for therein;
and each of this Agreement, the Warrant Agreement and the Representative's
Warrant Agreement has been duly authorized, executed and delivered by the
Company. Each of this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement, assuming due authorization, execution
and delivery by each other party thereto constitutes a legal, valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution may be limited
by applicable law), and none of the Company's execution or delivery of this
Agreement, the Warrant Agreement and the Representative's Warrant
Agreement, its performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and any
amendments or supplements thereto, conflicts with or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result
in the creation or imposition of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any
kind whatsoever upon, any property or assets (tangible or
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<PAGE>
intangible) of the Company pursuant to the terms of, (A) the certificate of
incorporation or by-laws of the Company, (B) any license, contract,
collective bargaining agreement, indenture, mortgage, deed of trust, lease,
voting trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a
party or by which it is or may be bound or to which any of its properties
or assets (tangible or intangible) is or may be subject, or any
indebtedness, or (C) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction
over the Company or any of its respective activities or properties.
viii. no consent, approval, authorization or order, and no filing
with, any court, regulatory body, government agency or other body (other
than such as may be required under Blue Sky laws, as to which no opinion
need be rendered) is required in connection with the issuance of the Firm
Securities and the Option Securities pursuant to the Prospectus and the
Registration Statement, the issuance of the Representative's Warrants, the
performance of this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement, and the transactions contemplated
hereby and thereby;
ix. the properties and business of the Company conform in all material
respects to the description thereof contained in the Registration Statement
and the Prospectus; and the Company has good and marketable title to, or
valid and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus to be owned or leased by it, in each case
free and clear of all liens, charges, claims, encumbrances, pledges,
security interests, defects or other restrictions or equities of any kind
whatsoever, other than those referred to in the Prospectus and liens for
taxes not yet due and payable;
x. the Company is not in breach of, or in default under, any term or
provision of any license, contract, collective bargaining agreement,
indenture, mortgage, installment sale agreement, deed of trust, lease,
voting trust agreement, stockholders' agreement, partnership agreement,
note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may be
bound or to which the property or assets (tangible or intangible) of the
Company is subject or affected; and the Company is not in violation of any
term or provision of its Articles of Incorporation or By-Laws or in
violation of any franchise, license, permit, judgment, decree, order,
statute, rule or regulation, domestic or foreign;
xi. the statements in the Prospectus under "RISK FACTORS," "BUSINESS,"
"MANAGEMENT," "PRINCIPAL STOCKHOLDERS," "CERTAIN TRANSACTIONS,"
"DESCRIPTION OF SECURITIES," and "SHARES ELIGIBLE FOR FUTURE SALE" have
been reviewed by such counsel, and insofar as they refer to statements of
law, descriptions of statutes, licenses, rules or regulations or legal
conclusions, are correct in all material respects;
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<PAGE>
xii. the Securities have been accepted for listing on the AMEX;
xiii. the persons listed under the caption "PRINCIPAL STOCKHOLDERS" in
the Prospectus are the respective "beneficial owners" (as such phrase is
defined in regulation 13d-3 under the Exchange Act) of the securities set
forth opposite their respective names thereunder as and to the extent set
forth therein;
xiv. neither the Company nor any of its respective officers,
stockholders, employees or agents, nor any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money,
gift or similar benefit (other than legal price concessions to customers in
the ordinary course of business) to any customer, supplier, employee or
agent of a customer or supplier, or official or employee of any
governmental agency or instrumentality of any government (domestic or
foreign) or any political party or candidate for office (domestic or
foreign) or other person who is or may be in a position to help or hinder
the business of the Company (or assist it in connection with any actual or
proposed transaction) which (A) might subject the Company to any damage or
penalty in any civil, criminal or governmental litigation or proceeding,
(B) if not given in the past, might have had an adverse effect on the
assets, business or operations of the Company, as reflected in any of the
financial statements contained in the Registration Statement, or (C) if not
continued in the future, might adversely affect the assets, business,
operations or prospects of the Company;
xv. no person, corporation, trust, partnership, association or other
entity has the right to include and/or register any securities of the
Company in the Registration Statement, require the Company to file any
registration statement or, if filed, to include any security in such
registration statement;
xvi. except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in the
nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or financial consulting arrangements or any other
arrangements, agreements, understandings, payments or issuances that may
affect the Underwriters' compensation, as determined by the NASD;
xvii. assuming due execution by the parties thereto other than the
Company, the Lock-up Agreements are legal, valid and binding obligations of
the parties thereto, enforceable against the party and any subsequent
holder of the securities subject thereto in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited by applicable
law);
xviii. except as described in the Prospectus, the Company (A) does not
maintain, sponsor or contribute to any ERISA Plans, (B) does not maintain
or contribute, now or at any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA, and (C) has never completely or
partially withdrawn from a "multiemployer plan";
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<PAGE>
xix. the minute books of the Company have been made available to the
Underwriters and contain a complete summary of all meetings and actions of
the directors and stockholders of the Company since the time of its
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects;
xx. except as set forth in the Prospectus and to the best knowledge of
such counsel, no officer, director or stockholder of the Company, or any
"affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any of the foregoing
persons or entities has or has had, either directly or indirectly, (A) an
interest in any person or entity which (x) furnishes or sells services or
products which are furnished or sold or are proposed to be furnished or
sold by the Company, or (y) purchases from or sells or furnishes to the
Company any goods or services, or (B) a beneficial interest in any contract
or agreement to which the Company is a party or by which of either them may
be bound or affected. Except as set forth in the Prospectus under "CERTAIN
TRANSACTIONS," there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among {the Company, and any
officer, director, or 5% or greater securityholder of the Company, or any
affiliate or associate of any such person or entity;
xxi. the Company is in compliance with all provisions of Section 1 of
Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing
Business with Cuba;
xxii. neither the Company nor any of its respective affiliates shall
be subject to the requirements of or shall be deemed an "Investment
Company," pursuant to and as defined under, respectively, the Investment
Company Act.
Such counsel shall state that such counsel has participated in conferences
with officers and other representatives of the Company and representatives of
the independent public accountants for the Company, at which conferences such
counsel made inquiries of such officers, representatives and accountants and
discussed the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus, and related matters and, although such counsel is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Preliminary
Prospectus, the Registration Statement and Prospectus, on the basis of the
foregoing, no facts have come to the attention of such counsel which lead them
to believe that either the Registration Statement or any amendment thereto, at
the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or any amendment or supplement thereto as
of the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or the Prospectus). Such counsel shall
further state that its opinion may be relied upon by Underwriters' Counsel in
rendering its opinion to the Underwriters.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are
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<PAGE>
admitted, to the extent such counsel deems proper and to the extent specified in
such opinion, if at all, upon an opinion or opinions (in form and substance
satisfactory to Underwriters' Counsel) of other counsel acceptable to
Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of
fact, to the extent they deem proper, on certificates and written statements of
responsible officers of the Company and certificates or other written statements
of officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company, provided
that copies of any such statements or certificates shall be delivered to
Underwriters' Counsel if requested. The opinion of such counsel for the Company
shall state that the opinion of any such other counsel is in form satisfactory
to such counsel and that the Representative, Underwriters' Counsel and they are
each justified in relying thereon. Any opinion of counsel for the Company shall
not state that it is to be governed or qualified by, or that it is otherwise
subject to, any treatise, written policy or other document relating to legal
opinions, including, without limitation, the Legal Opinion Accord of the ABA
Section of Business Law (1991) or any comparable state accord.
e. At the Closing Date, the Underwriters shall have received the
favorable opinion of Kenyon & Kenyon, special patent counsel to the Company,
dated the Closing Date, addressed to the Underwriters, in form and substance
satisfactory to Underwriters' Counsel, and in substantially the form of Schedule
B attached hereto.
f. At the Closing Date, the Underwriters shall have received the
favorable opinion of Crowell & Morings, special patent counsel to the Company,
dated the Closing Date, addressed to the Underwriters, in form and substance
satisfactory to Underwriters' Counsel, and in substantially the form of Schedule
C attached hereto.
g. At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinions of each of Breslow & Walker, LLP, counsel to the
Company, Kenyon & Kenyon, special patent counsel to the Company, and Crowell &
Morings, special patent counsel to the Company, dated such Option Closing Date,
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel confirming as of such Option Closing Date the statements
made by each of Breslow & Walker, LLP, Kenyon & Kenyon and Crowell Morings, in
their respective opinions delivered on the Closing Date.
h. On or prior to each of the Closing Date and each Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
i. Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no adverse change nor development involving a
prospective change in the condition, financial or otherwise, earnings, position,
value, properties, results of operations, prospects, stockholders' equity or the
business activities of the Company, whether or not in the ordinary course of
business, from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the
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<PAGE>
ordinary course of business, entered into by the Company, from the latest date
as of which the financial condition of the Company is set forth in the
Registration Statement and Prospectus which is adverse to the Company; (iii) the
Company shall not be in default under any provision of any instrument relating
to any outstanding indebtedness; (iv) the Company shall not have issued any
securities (other than the Securities) or declared or paid any dividend or made
any distribution in respect of its capital stock of any class and there has not
been any change in the capital stock or any change in the debt (long or short
term) or liabilities or obligations of the Company (contingent or otherwise);
(v) no material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus;
(vi) no action, suit or proceeding, at law or in equity, shall have been pending
or threatened (or circumstances giving rise to same) against the Company, or
affecting any of its properties or businesses before or by any court or federal,
state or foreign commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding may adversely affect the business,
operations, earnings, position, value, properties, results of operations,
prospects or financial condition or income of the Company; and (vii) no stop
order shall have been issued under the Act and no proceedings therefor shall
have been initiated, threatened or contemplated by the Commission.
j. At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
i. The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with
all agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such
Closing Date or Option Closing Date, as the case may be;
ii. No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the best of each of such
person's knowledge, after due inquiry, are contemplated or threatened under
the Act;
iii. The Registration Statement and the Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
and neither the Preliminary Prospectus or any supplement thereto included
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and
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<PAGE>
iv. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (a) the Company has
not incurred up to and including the Closing Date or the Option Closing
Date, as the case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent;
(b) the Company has not paid or declared any dividends or other
distributions on its capital stock; (c) the Company has not entered into
any transactions not in the ordinary course of business; (d) there has not
been any change in the capital stock or long-term debt or any increase in
the short-term borrowings (other than any increase in the short-term
borrowings in the ordinary course of business) of the Company; (e) the
Company has not sustained any loss or damage to any of its respective
properties or assets, whether or not insured; (f) there is no litigation
which is pending or threatened (or circumstances giving rise to same)
against the Company or any affiliated party of any of the foregoing which
is required to be set forth in an amended or supplemented Prospectus which
has not been set forth; and (g) there has occurred no event required to be
set forth in an amended or supplemented Prospectus which has not been set
forth.
References to the Registration Statement and the Prospectus in this subsection
(i) are to such documents as amended and supplemented at the date of such
certificate.
k. By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
l. At the time this Agreement is executed, the Underwriters shall have
received a letter, dated such date, addressed to the Underwriters in form and
substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from Richard A. Eisner & Company, LLP:
i. confirming that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
ii. stating that it is their opinion that the financial statements and
supporting schedules of the Company included in the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations thereunder and that
the Representative may rely upon the opinion of Richard A. Eisner &
Company, LLP with respect to the financial statements and supporting
schedules included in the Registration Statement;
iii. stating that, on the basis of a limited review which included a
reading of the latest available unaudited interim financial statements of
the Company, a reading of the latest available minutes of the stockholders
and board of directors and the various committees of the boards of
directors of the Company, consultations with officers and other employees
of the Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their attention
which would lead them to believe that (A) the pro forma financial
information contained in the Registration Statement
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<PAGE>
and Prospectus does not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations
or is not fairly presented in conformity with generally accepted accounting
principles applied on a basis consistent with that of the audited financial
statements of the Company or the unaudited pro forma financial information
included in the Registration Statement or (B) the unaudited financial
statements and supporting schedules of the Company included in the
Registration Statement do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with generally
accepted accounting principles applied on a basis substantially consistent
with that of the audited financial statements of the Company included in
the Registration Statement, or (C) at a specified date not more than five
(5) days prior to the effective date of the Registration Statement, there
has been any change in the capital stock or long-term debt of the Company,
or any decrease in the stockholders' equity or net current assets or net
assets of the Company as compared with amounts shown in the March 31, 1997
balance sheet included in the Registration Statement, other than as set
forth in or contemplated by the Registration Statement, or, if there was
any change or decrease, setting forth the amount of such change or
decrease, and (D) during the period from March 31, 1997 to a specified date
not more than five (5) days prior to the effective date of the Registration
Statement, there was any decrease in net revenues, net earnings or increase
in net earnings per common share of the Company, in each case as compared
with the corresponding period beginning March 31, 1996, other than as set
forth in or contemplated by the Registration Statement, or, if there was
any such decrease, setting forth the amount of such decrease;
iv. setting forth, at a date not later than five (5) days prior to the
date of the Registration Statement, the amount of liabilities of the
Company (including a break-down of commercial paper and notes payable to
banks);
v. stating that they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus
in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting
records, including work sheets, of the Company and excluding any questions
requiring an interpretation by legal counsel, with the results obtained
from the application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in accordance
with generally accepted auditing standards) set forth in the letter and
found them to be in agreement;
vi. statements as to such other matters incident to the transaction
contemplated hereby as the Representative may request.
m. At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Richard A. Eisner & Company, LLP a letter,
dated as of the Closing Date or the Option Closing Date, as the case may be, to
the effect that they reaffirm that statements made in the letter furnished
pursuant to subsection (l) of this Section, except that the specified date
referred to shall be a date not more than five (5) days prior to the Closing
Date or the
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Option Closing Date, as the case may be, and, if the Company has elected to rely
on Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (l) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Representative and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
n. On each of the Closing Date and each Option Closing Date, if any,
there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Firm Securities and Option
Securities, as the case may be.
o. No order suspending the sale of the Firm Securities and Option
Securities in any jurisdiction designated by the Representative pursuant to
subsection (e) of Section 4 hereof shall have been issued on either the Closing
Date or the Option Closing Date, if any, and no proceedings for that purpose
shall have been instituted or shall be contemplated.
p. On or before the Closing Date, the Company shall have executed and
delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit ____ to the Registration Statement,
in final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
q. On or before the Closing Date, the Firm Securities and Option
Securities shall have been duly approved for listing on AMEX, subject to
official notice of issuance.
r. On or before the Closing Date, there shall have been delivered to
the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
s. On or before the Closing Date, the Company shall have executed and
delivered to the Representative and the Transfer Agent the Warrant Agreement
substantially in the form filed as Exhibit ____ to the Registration Statement,
in final form and substance satisfactory to the Representative.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representative may terminate this Agreement or,
if the Representative so elects, it may waive any such conditions which have not
been fulfilled or extend the time for their fulfillment.
7. Indemnification.
a. The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any,
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<PAGE>
who controls the Underwriter ("controlling person") within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any
and all losses, claims, damages, expenses or liabilities, joint or several (and
actions, proceedings, investigations, inquiries, suits and litigation in respect
thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such claim, action, proceeding, investigation, inquiry, suit or litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon (A) any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Securities; or
(iii) in any application or other document or written communication (in this
Section 7 collectively called "application") executed by the Company or based
upon written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Nasdaq or any other
securities exchange; (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in strict conformity with
written information furnished to the Company with respect to any Underwriter by
or on behalf of such Underwriter expressly for use in any Preliminary
Prospectus, the Registration Statement or Prospectus, or any amendment thereof
or supplement thereto, or in any application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition to any
liability which the Company may have at common law or otherwise.
b. Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Firm Securities and the Option Securities set forth under the heading
"Underwriting" and
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<PAGE>
the stabilization legend in the Prospectus have been furnished by the
Underwriters expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriters for inclusion in the
Prospectus.
c. Promptly after receipt by an indemnified party under this Section 7
of notice of the commencement of any claim, action, suit, investigation,
inquiry, proceeding or litigation, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying parties under
this Section 7, notify each party against whom indemnification is to be sought
in writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may have
otherwise). In case any such claim, action, suit, investigation, inquiry,
proceeding or litigation is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of thereof at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense thereof within a reasonable
time after notice of commencement thereof, or (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to one or
all of the indemnifying parties (in which case the indemnifying parties shall
not have the right to direct the defense thereof on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one claim, action, suit,
investigation, inquiry, proceeding or litigation or separate but similar or
related claims, actions, suits, investigations, inquiries, proceedings or
litigation in the same jurisdiction arising out of the same general allegations
or circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim, action,
suit, investigation, inquiry, proceeding or litigation effected without its
written consent; provided, however, that such consent was not unreasonably
withheld. An indemnifying party will not, without the prior written consent of
the indemnified parties, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit,
investigation, inquiry, proceeding or litigation in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim, action, suit,
investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
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<PAGE>
d. In order to provide for just and equitable contribution in any case
in which (i) an indemnified party makes claim for indemnification pursuant to
this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Firm Securities and the Option Securities or (B) if the allocation provided
by clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable considerations.
In any case where the Company is the contributing party and the Underwriters are
the indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Firm Securities
and the Option Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, or by the
Underwriters, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Firm Securities and the Option Securities purchased by the Underwriters
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person, if any, who controls the Company or the Underwriter
within the meaning of the Act, each officer of the Company who has signed the
Registration Statement, and each director of the Company shall have the same
rights to contribution as the Company or the Underwriter, as the case may be,
subject in each case to this subsection (d). Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution may
be made against another party or parties under this subsection (d), notify such
party or parties from whom contribution may be sought, but the omission so to
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subsection (d), or to the extent that such party or
parties were not adversely affected by such omission. The contribution agreement
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<PAGE>
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All representations,
warranties and agreements contained in this Agreement or contained in
certificates of officers of the Company submitted pursuant hereto, shall be
deemed to be representations, warranties and agreements at the Closing Date and
the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representative, as the case may be.
9. Effective Date. This Agreement shall become effective at 10:00 a.m., New
York City time, on the next full business day following the date hereof, or at
such earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representative of telegrams to securities
dealers releasing such securities for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. Termination.
a. Subject to subsection (b) of this Section 10, the Representative
shall have the right to terminate this Agreement, (i) if any domestic or
international event or act or occurrence has disrupted, or in the
Representative's opinion will in the immediate future disrupt, the financial
markets; or (ii) if any material adverse change in the financial markets shall
have occurred; or (iii) if trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the NASD, the Boston Stock Exchange, any
over-the-counter market, the Commission or any other government authority having
jurisdiction, or if minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been required on the
over-the-counter market, by the NASD or by order of the Commission or any other
government or other authority having jurisdiction; or (iv) if trading of any of
the securities of the Company shall have been suspended, or any of the
securities of the Company shall have been delisted, on any exchange or in any
over-the-counter market; or (v) if the United States shall have become involved
in a war or major hostilities, or if there shall have been an escalation in an
existing war or major hostilities or a national emergency shall have been
declared in the United States; or (vi) if a banking moratorium has been declared
by a state or federal authority; or (vii) if a moratorium in foreign exchange
trading has been declared; or (viii) if the Company shall have sustained a loss
material or substantial to the Company by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not such loss shall have been insured, will, in the Representative's opinion,
make it inadvisable to proceed
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<PAGE>
with the offering, sale and/or delivery of the Securities; or (ix) if there
shall have been such a material adverse change in the conditions or prospects of
the Company, or such material adverse change in the general market, political or
economic conditions, in the United States or elsewhere, that, in each case, in
the Representative's judgment, would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities or (x) if Jonathan Charry shall
no longer serve the Company in his present capacity.
b. If this Agreement is terminated by the Representative in accordance
with the provisions of Section 10(a) the Company shall promptly reimburse and
indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to Section 5(c) above). Notwithstanding any
contrary provision contained in this Agreement, if this Agreement shall not be
carried out within the time specified herein, or any extension thereof granted
by the Representative, by reason of any failure on the part of the Company to
perform any undertaking or satisfy any condition of this Agreement by it to be
performed or satisfied (including, without limitation, pursuant to Section 6 or
Section 12) then, the Company shall promptly reimburse and indemnify the
Representative for all of its actual out-of-pocket expenses, including the fees
and disbursements of counsel for the Underwriters (less amounts previously paid
pursuant to Section 5(c) above). In addition, the Company shall remain liable
for all Blue Sky counsel fees and disbursements, expenses and filing fees.
Notwithstanding any contrary provision contained in this Agreement, any election
hereunder or any termination of this Agreement (including, without limitation,
pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not this Agreement
is otherwise carried out, the provisions of Section 5 and Section 7 shall not be
in any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
11. Substitution of the Underwriters. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Securities to be purchased on such date, the
non-defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Securities, this Agreement shall terminate without liability
on the part of any non-defaulting Underwriters (or, if such default shall
occur with respect to any Option Securities to be purchased on an Option
Closing Date, the Underwriters may at the
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<PAGE>
Representative's option, by notice from the Representative to the Company,
terminate the Underwriters' obligation to purchase Option Securities from
the Company on such date).
No action taken pursuant to this Section 11 shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a termination of
this Agreement, the Representative shall have the right to postpone the Closing
Date for a period not exceeding seven (7) days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements.
12. Default by the Company. If the Company shall fail at the Closing Date
or at any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at the Representative's option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any
non-defaulting party other than pursuant to Section 5, Section 7 and Section 10
hereof. No action taken pursuant to this Section 12 shall relieve the Company
from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative at National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle, Washington 98154, Attention: Steven A. Rothstein, Chairman, with
a copy to Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New
York 10103, Attention: Lawrence B. Fisher, Esq. Notices to the Company shall be
directed to the Company at 1675 Broadway, New York, NY 10019, Attention:
Jonathan Charry, with a copy to Breslow & Walker, LLP, 767 Third Avenue, New
York, NY 10017, Attention: Gary T. Moomjian, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
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<PAGE>
17. Entire Agreement; Amendments. This Agreement, the Warrant Agreement and
the Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
QUIETPOWER SYSTEMS, INC.
By:
-----------------------------
Jonathan Charry
President
Confirmed and accepted as of
the date first above written.
NATIONAL SECURITIES CORPORATION
For itself and as Representative
of the several Underwriters named
in Schedule A hereto.
By:
---------------------------------
Steven A. Rothstein
Chairman
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<PAGE>
SCHEDULE A
Number of Shares Number of Redeemable
Name of Underwriters to be Purchased Warrants to be Purchased
- -------------------- ---------------- -------------------------
National Securities
Corporation.......
Total............................. 2,000,000 2,000,000
========= =========
<PAGE>
SCHEDULE B
[FORM OF INTELLECTUAL PROPERTY OPINION FROM KENYON & KENYON]
___________________, 1997
NATIONAL SECURITIES CORPORATION
As Representative of the several
Underwriters named in Schedule A
to the Underwriting Agreement
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Re: Initial Public Offering of 2,000,000 Shares of Common Stock and
2,000,000 Redeemable Common Stock Purchase Warrants
of QuietPower Systems, Inc.
Gentlemen:
We have acted as special counsel to QuietPower Systems, Inc., a
Delaware corporation (the "Company"), in connection with the entering into by
the Company of that certain Underwriting Agreement by and between National
Securities Corporation (as representative of the several underwriters named
therein) (the "Representative") and the Company, dated _______________, 1997
(the "Underwriting Agreement"). This opinion is provided to you pursuant to
Section 6(e) of the Underwriting Agreement.
For the purpose of rendering the opinions set forth below we have
reviewed the following (collectively, the "Documents"):
(i) the Underwriting Agreement;
(ii) that certain Form S-1 as filed by the Company with the
Securities and Exchange Commission on ______, 1997, together with
any and all exhibits and schedules and all heretofore filed
amendments thereto (collectively, the "Registration Statement");
(iii) the Company's prospectus dated _______________, 1997 (the
"Prospectus");
<PAGE>
-2- _____________, 1997
(iv) a search of the United States Patent and Trademark Office
records relevant to ownership of any and all:
patents and patent applications (including, without
limitation, the patents and patent applications listed on
Schedule A annexed hereto and hereby incorporated by reference
herein (collectively, the "Patents")), and trademarks,
trademark applications, service marks and service mark
applications (collectively, the "Marks") (including, without
limitation, the Marks listed on Schedule B annexed hereto and
hereby incorporated by reference herein (collectively, the
"Trademarks")),
owned, purportedly owned or licensed by the Company (including,
those patents, patent applications and Marks licensed, without
limitation, pursuant to the licenses listed on Schedule C annexed
hereto and hereby incorporated by reference herein (collectively,
the "Licenses")), conducted by ______________________________ and
certified as true and correct as of _______________________, 1997
(no earlier than 5 days prior to the effective date of the
Registration Statement);
(v) a search of the United States Copyright Office records relevant
to ownership of any and all copyrighted material (including, without
limitation, the copyright in, or license permitting the Company's
actual use of, the material licensed or otherwise distributed by the
Company and listed on Schedule D annexed hereto and hereby
incorporated by reference herein (collectively, the "Copyrighted
Material")), owned, purportedly owned or licensed by the Company
conducted by _____________________ and certified as true and correct
as of __________________, 1997 (no earlier than 5 days prior to the
effective date of the Registration Statement);
(vi) an intellectual property litigation search with respect to all
Patents, Trademarks, Licenses and Copyrighted Material, listed on
Schedules A, B, C and D, respectively;
(vii) a search of the Uniform Commercial Code ("UCC") recordation
offices, in the following jurisdictions ____, with respect to the
following two categories of general intangibles:
(a) the intellectual property general intangibles of the
Company, including, without limitation, the Company's patents,
patent applications, inventions, know how, trademarks, service
marks, copyrights, service and trade names, intellectual
property licenses and other rights, and
(b) the intellectual property general intangibles licensed to
the Company, including, without limitation, the patents,
patent applications, inventions,
<PAGE>
-3- _____________, 1997
know how, trademarks, service marks, copyrights, service and
trade names and other intellectual property rights licensed to
the Company pursuant to the Licenses (listed on Schedule C),
said search certified to us as complete and accurate by
________________ and current through ________________________, 1997
(no earlier than 5 days prior to the effective date of the
Registration Statement) and said jurisdictions being the only
jurisdictions in which filing of UCC financing statements or other
documents may be filed to effectively evidence a security or other
interest in said general intangibles; and
(viii) any and all records, documents, instruments and agreements in
our possession or under our control relating to the Company.
We have also examined such corporate records, documents, instruments
and agreements, and inquired into such other matters, as we have deemed
necessary or appropriate as a basis for the opinions set forth herein. Whenever
our opinion herein is qualified by the phrase "to the best of our knowledge" or
"to the best of our knowledge, after due inquiry," such language means that,
based upon (i) our inquiries of officers of the Company, (ii) our review of the
Documents, and (iii) our review of such other corporate records, documents,
instruments and agreements described in the first sentence of this paragraph, we
believe that such opinions are factually correct.
To the best of our knowledge, as to all matters of fact represented
to you by the Company, we advise you that nothing has come to our attention that
would cause us to believe that such facts are incorrect, incomplete or
misleading or that reliance thereon is not warranted under the circumstances. We
call to your attention that our opinion is limited to such facts as they exist
on the date hereof and do not take into account any change of circumstances,
fact or law subsequent thereto.
Based upon and subject to the foregoing, we are of the opinion that:
1. To the best of our knowledge, after due inquiry, except as
described in the Prospectus, the Company owns or has the right to
use, free and clear of all liens, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind
whatsoever,
(i) all patents and patent applications (including, without
limitation, the Patents),
(ii) all trademarks and service marks (including, without
limitation, the Trademarks),
<PAGE>
-4- _____________, 1997
(iii) all copyrights (including, without limitation, the
Copyrighted Material),
(iv) all service and trade names, and
(v) all intellectual property licenses (including, without
limitation, the Licenses),
used in, or required for, the conduct of the Company's business.
2. To the best of our knowledge, after due inquiry, the
Company possesses all material intellectual property licenses or
rights used in, or required for, the conduct of its respective
business (including, the Licenses and without limitation, any such
licenses or rights described in the Prospectus as being owned,
possessed or licensed by the Company, as the case may be) and such
licenses and rights are in full force and effect.
3. To the best of our knowledge, after due inquiry, there is
no claim or action, pending, threatened or potential, which affects
or could affect the rights of the Company with respect to any
trademarks, service marks, copyrights, service names, trade names,
patents, patent applications or licenses used in, or required for,
the conduct of the Company's business.
4. To the best of our knowledge, after due inquiry, there is
no intellectual property based claim or action, pending, threatened
or potential, which affects or could affect the rights of the
Company with respect to any products, services, processes or
licenses, including, without limitation, the Licenses used in the
conduct of the Company's business.
5. To the best of our knowledge, after due inquiry, except as
described in the Prospectus, the Company is not under any obligation
to pay royalties or fees to any third party with respect to any
material, technology or intellectual properties developed, employed,
licensed or used by the Company.
6. To the best of our knowledge, after due inquiry, the
statements in the Prospectus under the headings, "Risk Factors -
Dependence on NCT," "Risk Factors - Dependence on Patents; Uncertain
Proprietary Protection," "Business Contractual Agreements with NCT"
and "Business - Patent Protection," are accurate in all material
respects, fairly represent the information disclosed therein and do
not omit to state any fact necessary to make the statements made
therein complete and accurate.
<PAGE>
-5- _____________, 1997
7. To the best of our knowledge, after due inquiry, the
statements in the Registration Statement and Prospectus do not
contain any untrue statement of a material fact with respect to the
intellectual property position of the Company, or omit to state any
material fact relating to the intellectual property position of the
Company which is required to be stated in the Registration Statement
and the Prospectus or is necessary to make the statements therein
not misleading.
We call your attention to the fact that the members of this firm are
licensed to practice law in the State of ______________ and before the United
States Patent and Trademark Office as Registered Patent Attorneys. Accordingly,
we express no opinion with respect to the laws, rules and regulations of any
jurisdictions other than the State of ___________ and the United States of
America.
The opinions expressed herein are for the sole benefit of, and may
be relied upon only by, the several Underwriters named in Schedule A to the
Underwriting Agreement and Orrick, Herrington & Sutcliffe LLP.
Very truly yours,
<PAGE>
SCHEDULE C
[FORM OF INTELLECTUAL PROPERTY OPINION
FROM CROWELL & MORINGS]
___________________, 1997
NATIONAL SECURITIES CORPORATION
As Representative of the several
Underwriters named in Schedule A
to the Underwriting Agreement
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Re: Initial Public Offering of 2,000,000 Shares of Common Stock and
2,000,000 Redeemable Common Stock Purchase Warrants
of QuietPower Systems, Inc.
Gentlemen:
We have acted as special counsel to QuietPower Systems, Inc., a
Delaware corporation (the "Company"), in connection with the entering into by
the Company of that certain Underwriting Agreement by and between National
Securities Corporation (as representative of the several underwriters named
therein) (the "Representative") and the Company, dated _______________, 1997
(the "Underwriting Agreement"). This opinion is provided to you pursuant to
Section 6(e) of the Underwriting Agreement.
For the purpose of rendering the opinions set forth below we have
reviewed the following (collectively, the "Documents"):
(i) the Underwriting Agreement;
(ii) that certain Form S-1 as filed by the Company with the
Securities and Exchange Commission on ______, 1997, together with
any and all exhibits and schedules and all heretofore filed
amendments thereto (collectively, the "Registration Statement");
(iii) the Company's prospectus dated _______________, 1997 (the
"Prospectus");
<PAGE>
-2- _____________, 1997
(iv) a search of the United States Patent and Trademark Office
records relevant to ownership of any and all:
patents and patent applications (including, without
limitation, the patents and patent applications listed on
Schedule A annexed hereto and hereby incorporated by reference
herein (collectively, the "Patents")), and trademarks,
trademark applications, service marks and service mark
applications (collectively, the "Marks") (including, without
limitation, the Marks listed on Schedule B annexed hereto and
hereby incorporated by reference herein (collectively, the
"Trademarks")),
owned, purportedly owned or licensed by the Company (including,
those patents, patent applications and Marks licensed, without
limitation, pursuant to the licenses listed on Schedule C annexed
hereto and hereby incorporated by reference herein (collectively,
the "Licenses")), conducted by ______________________________ and
certified as true and correct as of _______________________, 1997
(no earlier than 5 days prior to the effective date of the
Registration Statement);
(v) a search of the United States Copyright Office records relevant
to ownership of any and all copyrighted material (including, without
limitation, the copyright in, or license permitting the Company's
actual use of, the material licensed or otherwise distributed by the
Company and listed on Schedule D annexed hereto and hereby
incorporated by reference herein (collectively, the "Copyrighted
Material")), owned, purportedly owned or licensed by the Company
conducted by _____________________ and certified as true and correct
as of __________________, 1997 (no earlier than 5 days prior to the
effective date of the Registration Statement);
(vi) an intellectual property litigation search with respect to all
Patents, Trademarks, Licenses and Copyrighted Material, listed on
Schedules A, B, C and D, respectively;
(vii) a search of the Uniform Commercial Code ("UCC") recordation
offices, in the following jurisdictions ____, with respect to the
following two categories of general intangibles:
(a) the intellectual property general intangibles of the
Company, including, without limitation, the Company's patents,
patent applications, inventions, know how, trademarks, service
marks, copyrights, service and trade names, intellectual
property licenses and other rights, and
(b) the intellectual property general intangibles licensed to
the Company, including, without limitation, the patents,
patent applications, inventions,
<PAGE>
-3- _____________, 1997
know how, trademarks, service marks, copyrights, service and
trade names and other intellectual property rights licensed to
the Company pursuant to the Licenses (listed on Schedule C),
said search certified to us as complete and accurate by
________________ and current through ________________________, 1997
(no earlier than 5 days prior to the effective date of the
Registration Statement) and said jurisdictions being the only
jurisdictions in which filing of UCC financing statements or other
documents may be filed to effectively evidence a security or other
interest in said general intangibles; and
(viii) any and all records, documents, instruments and agreements in
our possession or under our control relating to the Company.
We have also examined such corporate records, documents, instruments
and agreements, and inquired into such other matters, as we have deemed
necessary or appropriate as a basis for the opinions set forth herein. Whenever
our opinion herein is qualified by the phrase "to the best of our knowledge" or
"to the best of our knowledge, after due inquiry," such language means that,
based upon (i) our inquiries of officers of the Company, (ii) our review of the
Documents, and (iii) our review of such other corporate records, documents,
instruments and agreements described in the first sentence of this paragraph, we
believe that such opinions are factually correct.
To the best of our knowledge, as to all matters of fact represented
to you by the Company, we advise you that nothing has come to our attention that
would cause us to believe that such facts are incorrect, incomplete or
misleading or that reliance thereon is not warranted under the circumstances. We
call to your attention that our opinion is limited to such facts as they exist
on the date hereof and do not take into account any change of circumstances,
fact or law subsequent thereto.
Based upon and subject to the foregoing, we are of the opinion that:
1. To the best of our knowledge, after due inquiry, except as
described in the Prospectus, the Company owns or has the right to
use, free and clear of all liens, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind
whatsoever,
(i) all patents and patent applications (including, without
limitation, the Patents),
(ii) all trademarks and service marks (including, without
limitation, the Trademarks),
<PAGE>
-4- _____________, 1997
(iii) all copyrights (including, without limitation, the
Copyrighted Material),
(iv) all service and trade names, and
(v) all intellectual property licenses (including, without
limitation, the Licenses),
used in, or required for, the conduct of the Company's business.
2. To the best of our knowledge, after due inquiry, the
Company possesses all material intellectual property licenses or
rights used in, or required for, the conduct of its respective
business (including, the Licenses and without limitation, any such
licenses or rights described in the Prospectus as being owned,
possessed or licensed by the Company, as the case may be) and such
licenses and rights are in full force and effect.
3. To the best of our knowledge, after due inquiry, there is
no claim or action, pending, threatened or potential, which affects
or could affect the rights of the Company with respect to any
trademarks, service marks, copyrights, service names, trade names,
patents, patent applications or licenses used in, or required for,
the conduct of the Company's business.
4. To the best of our knowledge, after due inquiry, there is
no intellectual property based claim or action, pending, threatened
or potential, which affects or could affect the rights of the
Company with respect to any products, services, processes or
licenses, including, without limitation, the Licenses used in the
conduct of the Company's business.
5. To the best of our knowledge, after due inquiry, except as
described in the Prospectus, the Company is not under any obligation
to pay royalties or fees to any third party with respect to any
material, technology or intellectual properties developed, employed,
licensed or used by the Company.
6. To the best of our knowledge, after due inquiry, the
statements in the Prospectus under the headings, "Risk Factors -
Dependence on Patents; Uncertain Proprietary Protection" and
"Business - Patent Protection", are accurate in all material
respects, fairly represent the information disclosed therein and do
not omit to state any fact necessary to make the statements made
therein complete and accurate.
7. To the best of our knowledge, after due inquiry, the
statements in the Registration Statement and Prospectus do not
contain any untrue statement of a
<PAGE>
-5- _____________, 1997
material fact with respect to the intellectual property position of
the Company, or omit to state any material fact relating to the
intellectual property position of the Company which is required to
be stated in the Registration Statement and the Prospectus or is
necessary to make the statements therein not misleading.
We call your attention to the fact that the members of this firm are
licensed to practice law in the State of ______________ and before the United
States Patent and Trademark Office as Registered Patent Attorneys. Accordingly,
we express no opinion with respect to the laws, rules and regulations of any
jurisdictions other than the State of ___________ and the United States of
America.
The opinions expressed herein are for the sole benefit of, and may
be relied upon only by, the several Underwriters named in Schedule A to the
Underwriting Agreement and Orrick, Herrington & Sutcliffe LLP.
Very truly yours,
<PAGE>
Exhibit 4.2
DRAFT
5/20/97
[FORM OF WARRANT AGREEMENT - SUBJECT TO ADDITIONAL REVIEW]
- --------------------------------------------------------------------------------
QUIETPOWER SYSTEMS, INC.
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
AND
NATIONAL SECURITIES CORPORATION
----------
WARRANT AGREEMENT
Dated as of ____________ __, 1997
- --------------------------------------------------------------------------------
<PAGE>
AGREEMENT, dated this __ day of ___________ , 1997 by and among
QUIETPOWER SYSTEMS, INC., a Delaware corporation (the "Company"), CONTINENTAL
STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant Agent"), and
NATIONAL SECURITIES CORPORATION, its successors and assigns (collectively,
"National" or the "Representative").
W I T N E S S E T H:
WHEREAS, in connection with (i) the offering to the public of up to
2,000,000 shares of Common Stock (as defined in Section 1) and 2,000,000
redeemable common stock purchase warrants (the "Warrants"), each Warrant
entitling the holder thereof to purchase one additional share of Common Stock,
(ii) the over-allotment option to purchase up to an additional 300,000 shares of
Common Stock and/or 300,000 Warrants (the "Over-allotment Option"), and (iii)
the sale to National of warrants (the "Representative's Warrants") to purchase
up to 200,000 shares of Common Stock and/or 200,000 Warrants, the Company will
issue up to 2,5000,000 Warrants (subject to increase as provided herein and in
the Representative's Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of
the Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the Warrants
and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants
<PAGE>
and the certificates representing the Warrants and the respective rights and
obligations thereunder of the Company, National, the holders of certificates
representing the Warrants and the Warrant Agent, the parties hereto agree as
follows:
SECTION 1. Definitions. As used herein, the following terms shall
have the following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "AMEX" shall mean the American Stock Exchange.
(c) "Common Stock" shall mean the authorized stock of the
Company of any class, whether now or hereafter authorized, which has the right
to participate in the voting and in the distribution of earnings and assets of
the Company without limit as to amount or percentage which at the date hereof
consists of [_] shares of Common Stock, $.01 par value per share.
(d) "Commission" shall mean the Securities and Exchange
Commission.
(e) "Corporate Office" shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its business in New
York, New York, shall be administered, which office is located on the date
hereof at 2 Broadway, New York, New York, 10004.
(f) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(g) "Exercise Date" shall mean, subject to the provisions of
Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent
shall have received both (i) the Warrant Certificate representing such Warrant,
with the exercise form thereon duly executed by the Registered Holder thereof or
his attorney duly authorized in writing, and (ii) payment in
2
<PAGE>
cash or by official bank or certified check made payable to the Warrant Agent
for the account of the Company, of the amount in lawful money of the United
States of America equal to the applicable Purchase Price (as hereinafter
defined) in good funds.
(h) "Initial Warrant Exercise Date" shall mean _____________
__, 1997 [the date of the Prospectus].
(i) "Initial Warrant Redemption Date" shall mean
_______________ __, 1998 [13 months from the date of the Prospectus].
(j) "NASD" shall mean the National Association of Securities
Dealers, Inc.
(k) "Nasdaq" shall mean the Nasdaq Stock Market.
(l) "Purchase Price" shall mean, subject to modification and
adjustment as provided in Section 8, $_____ per share of Common Stock [150% of
the initial public offering price of the Common Stock].
(m) "Redemption Date" shall mean the date (which may not occur
before the Initial Warrant Redemption Date) fixed for the redemption of the
Warrants in accordance with the terms hereof.
(n) "Redemption Price" shall mean the price at which the
Company may, at its option, redeem the Warrants, in accordance with the terms
hereof, which price shall be $0.05 per Warrant, subject to adjustment from time
to time pursuant to the provisions of Section 9 hereof.
(o) "Registered Holder" shall mean the person in whose name
any certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
3
<PAGE>
(p) "Representative's Warrant Agreement" shall mean the
agreement dated as of _______________ __, 1997 [the date of the Prospectus]
between the Company and National relating to and governing the terms and
provisions of the Representative's Warrants.
(q) "Transfer Agent" shall mean American Stock Transfer &
Trust Company, or its authorized successor.
(r) "Underwriting Agreement" shall mean the underwriting
agreement dated ______________ __, 1997 [the date of the Prospectus] between the
Company and the several underwriters listed therein relating to the purchase for
resale to the public of the 2,000,000 shares of Common Stock and 2,000,000
Warrants.
(s) "Warrant Certificate" shall mean a certificate
representing each of the Warrants substantially in the form annexed hereto as
Exhibit A.
(t) "Warrant Expiration Date" shall mean, unless the Warrants
are redeemed as provided in Section 9 hereof prior to such date, 5:30 p.m. (New
York time), on ______________ __, 2002 [60 months after the date of the
Prospectus], or the Redemption Date as defined herein, whichever date is
earlier; provided that if such date shall in the State of New York be a holiday
or a day on which banks are authorized to close, then 5:30 p.m. (New York time)
on the next following day which, in the State of New York, is not a holiday or a
day on which banks are authorized to close. Upon five business days' prior
written notice to the Registered Holders, the Company shall have the right to
extend the Warrant Expiration Date.
4
<PAGE>
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the Registered Holder
of the Warrant Certificate representing such Warrant to purchase at the Purchase
Price therefor from the Initial Warrant Exercise Date until the Warrant
Expiration Date one share of Common Stock upon the exercise thereof in
accordance with the terms hereof, subject to modification and adjustment as
provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
(subject to modification and adjustment as provided in Section 8) shall be
executed by the Company and delivered to the Warrant Agent.
(c) Upon exercise of the Representative's Warrants as provided
therein, Warrant Certificates representing all or a portion of 200,000 Warrants
to purchase up to an aggregate of 200,000 shares of Common Stock (subject to
modification and adjustment as provided in Section 8 hereof and in the
Representative's Warrant Agreement) shall be countersigned, issued and delivered
by the Warrant Agent upon written order of the Company signed by its Chairman of
the Board, Chief Executive Officer, President or a Vice President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary.
(d) From time to time, up to the Warrant Expiration Date or
the Redemption Date, whichever date is earlier, the Warrant Agent shall
countersign and deliver Warrant Certificates in required denominations of one or
whole number multiples thereof to the person entitled thereto in connection with
any transfer or exchange permitted under this Agreement. Except as provided
herein, no Warrant Certificates shall be issued except (i) Warrant Certificates
initially issued hereunder, those issued pursuant to the exercise of the Over-
5
<PAGE>
allotment Option and those issued on or after the Initial Warrant Exercise Date,
upon the exercise of fewer than all Warrants held by the exercising Registered
Holder, (ii) Warrant Certificates issued upon any transfer or exchange of
Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant
Certificates issued pursuant to the Representative's Warrant Agreement, and (v)
at the option of the Company, Warrant Certificates in such form as may be
approved by its Board of Directors, to reflect any adjustment or change in the
Purchase Price, the number of shares of Common Stock purchasable upon exercise
of the Warrants or the Redemption Price therefor made pursuant to Section 8
hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The Warrant Certificates shall
be dated the date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates) and issued in registered form. Warrants shall be numbered serially
with the letter W on the Warrants.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, President or any
Vice President and by its
6
<PAGE>
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary,
by manual signatures or by facsimile signatures printed thereon, and shall have
imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall
be manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Warrant Certificates shall cease to be such officer of
the Company before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent,
issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of the
Company. After countersignature by the Warrant Agent, Warrant Certificates shall
be delivered by the Warrant Agent to the Registered Holder promptly and without
further action by the Company, except as otherwise provided by Section 4(a)
hereof.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number multiples
thereof may be exercised by the Registered Holder thereof commencing at any time
on or after the Initial Warrant Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth herein
and in the applicable Warrant Certificate. A Warrant shall be deemed to have
been exercised immediately prior to the close of business on the Exercise Date
and the person entitled to receive the securities deliverable upon such exercise
shall be treated for all purposes as the holder, upon exercise thereof, as of
the close of business on the Exercise Date. If Warrants in denominations other
than whole number multiples thereof shall be exercised at one time by the same
Registered Holder, the number of full shares of Common Stock which shall be
issuable upon exercise thereof shall be computed on the basis of
7
<PAGE>
the aggregate number of full shares of Common Stock issuable upon such exercise.
As soon as practicable on or after the Exercise Date and in any event within
five business days after such date, if one or more Warrants have been exercised,
the Warrant Agent on behalf of the Company shall cause to be issued to the
person or persons entitled to receive the same a Common Stock certificate or
certificates for the shares of Common Stock deliverable upon such exercise, and
the Warrant Agent shall deliver the same to the person or persons entitled
thereto. Upon the exercise of any one or more Warrants, the Warrant Agent shall
promptly notify the Company in writing of such fact and of the number of
securities delivered upon such exercise and, subject to subsection (b) below,
shall cause all payments of an amount in cash or by check made payable to the
order of the Company, equal to the Purchase Price, to be deposited promptly in
the Company's bank account.
(b) At any time upon the exercise of any Warrants after one
year from the date hereof, the Warrant Agent shall, on a daily basis, within two
business days after such exercise, notify National of the exercise of any such
Warrants and shall, on a weekly basis (subject to collection of funds
constituting the tendered Purchase Price, but in no event later than five
business days after the last day of the calendar week in which such funds were
tendered), remit to National an amount equal to five percent (5%) of the
Purchase Price of such Warrants then being exercised unless National shall have
notified the Warrant Agent that the payment of such amount with respect to such
Warrant is violative of the General Rules and Regulations promulgated under the
Exchange Act, or the rules and regulations of the NASD or applicable state
securities or "blue sky" laws, or the Warrants are those underlying the
Representative's Warrants in which event, the Warrant Agent shall have to pay
such amount to the Company; provided, that the Warrant Agent shall not be
obligated to pay any amounts pursuant to this
8
<PAGE>
Section 4(b) during any week that such amounts payable are less than $1,000 and
the Warrant Agent's obligation to make such payments shall be suspended until
the amount payable aggregates $1,000, and provided further, that, in any event,
any such payment (regardless of amount) shall be made not less frequently than
monthly. Notwithstanding the foregoing, National shall be entitled to receive
the commission contemplated by this Section 4(b) as Warrant solicitation agent
only if: (i) National has provided actual services in connection with the
solicitation of the exercise of a Warrant(s) by a Registered Holder and (ii) the
Registered Holder exercising a Warrant(s) affirmatively designates in writing on
the exercise form on the reverse side of the Warrant Certificate that the
exercise of such Registered Holder's Warrant(s) was solicited by National.
(c) The Company shall not be required to issue fractional
shares on the exercise of Warrants. Warrants may only be exercised in such
multiples as are required to permit the issuance by the Company of one or more
whole shares. If one or more Warrants shall be presented for exercise in full at
the same time by the same Registered Holder, the number of whole shares which
shall be issuable upon such exercise thereof shall be computed on the basis of
the aggregate number of shares purchasable on exercise of the Warrants so
presented. If any fraction of a share would, except for the provisions provided
herein, be issuable on the exercise of any Warrant (or specified portion
thereof), the Company shall pay an amount in cash equal to such fraction
multiplied by the then current market value of a share of Common Stock,
determined as follows:
(1) If the Common Stock is listed, or admitted to unlisted trading
privileges on AMEX or a national securities exchange, or is traded on Nasdaq,
the current market value of a share of Common Stock shall be the closing sale
price of the Common Stock at the end of
9
<PAGE>
the regular trading session on the last business day prior to the date of
exercise of the Warrants on whichever of such exchanges or Nasdaq had the
highest average daily trading volume for the Common Stock on such day; or
(2) If the Common Stock is not listed or admitted to unlisted
trading privileges on AMEX or any national securities exchange, or listed,
quoted or reported for trading on Nasdaq, but is traded in the over-the-counter
market, the current market value of a share of Common Stock shall be the average
of the last reported bid and asked prices of the Common Stock reported by the
National Quotation Bureau, Inc. on the last business day prior to the date of
exercise of the Warrants; or
(3) If the Common Stock is not listed, admitted to unlisted trading
privileges on AMEX or any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, and bid and asked prices of the Common Stock are
not reported by the National Quotation Bureau, Inc., the current market value of
a share of Common Stock shall be an amount, not less than the book value thereof
as of the end of the most recently completed fiscal quarter of the Company
ending prior to the date of exercise, determined by the members of the Board of
Directors of the Company exercising good faith and using customary valuation
methods.
10
<PAGE>
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
(a) The Company covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall, at the time of delivery thereof, be duly and validly
issued and fully paid and nonassessable and free from all preemptive or similar
rights, taxes, liens and charges with respect to the issue thereof, and that
upon issuance such shares shall be listed on each securities exchange, if any,
on which the other shares of outstanding Common Stock of the Company are then
listed.
(b) The Company covenants that if any securities to be
reserved for the purpose of exercise of Warrants hereunder require registration
with, or approval of, any governmental authority under any federal securities
law before such securities may be validly issued or delivered upon such
exercise, then the Company will file a registration statement under the federal
securities laws or a post-effective amendment, use its best efforts to cause the
same to become effective and to keep such registration statement current while
any of the Warrants are outstanding and deliver a prospectus which complies with
Section 10(a)(3) of the Act, to the Registered Holder exercising the Warrant
(except, if in the opinion of counsel to the Company, such registration is not
required under the federal securities laws or if the Company receives a letter
from the staff of the Commission stating that it would not take any enforcement
action if such registration is not effected). The Company will use its best
efforts to obtain appropriate approvals or registrations under state "blue sky"
securities laws with respect to any such
11
<PAGE>
securities. However, Warrants may not be exercised by, or shares of Common Stock
issued to, any Registered Holder in any state in which such exercise would be
unlawful.
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance or delivery of any shares of Common Stock
upon exercise of the Warrants; provided, however, that if shares of Common Stock
are to be delivered in a name other than the name of the Registered Holder of
the Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing shares
of Common Stock or other securities required upon exercise of the Warrants, and
the Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and, upon satisfaction of the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at its office, books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the
12
<PAGE>
transfer thereof in accordance with customary practice. Upon due presentment for
registration of transfer of any Warrant Certificate at such office, the Company
shall execute and the Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants of the same class.
(c) With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney-in-fact duly
authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for
any exchange or registration of transfer of Warrant Certificates. In addition,
the Company may require payment by such Holder of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly canceled by
the Warrant Agent and thereafter retained by the Warrant Agent until termination
of this Agreement.
(f) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary.
13
<PAGE>
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and the loss,
theft, destruction or mutilation of any Warrant Certificate and (in the case of
loss, theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or the
Warrant Agent that a new Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares of
Common Stock Deliverable.
(a) Except as hereinafter provided, in the event the Company
shall, at any time or from time to time after the date hereof and prior to the
Warrant Expiration Date, issue or sell any shares of Common Stock for a
consideration per share less than the Purchase Price or issue any shares of
Common Stock as a stock dividend to the holders of Common Stock, or subdivide or
combine the outstanding shares of Common Stock into a greater or lesser number
of shares (any such issuance, subdivision or combination being herein called a
"Change of Shares"), then, and thereafter upon each further Change of Shares,
the Purchase Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to such Change of Shares shall be
changed to a price (including any applicable fraction of a cent to the nearest
cent) determined by dividing (i) the sum of (x) the total number of shares of
Common Stock outstanding immediately prior to such Change of Shares, multiplied
by the
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<PAGE>
Purchase Price in effect immediately prior to such Change of Shares and (y) the
consideration, if any, received by the Company upon such sale, issuance,
subdivision or combination, by (ii) the total number of shares of Common Stock
outstanding immediately after such Change of Shares; provided, however, that in
no event shall the Purchase Price be adjusted pursuant to this computation to an
amount in excess of the Purchase Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of Common
Stock.
For the purposes of any adjustment to be made in accordance with
this Section 8(a), the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock
(or of other securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which shall be cash,
the amount of the cash portion of the consideration therefor deemed to have been
received by the Company shall be (i) the subscription price, if shares of Common
Stock are offered by the Company for subscription, or (ii) the public offering
price (before deducting therefrom any compensation paid or discount allowed in
the sale, underwriting or purchase thereof by underwriters or dealers or others
performing similar services, or any expenses incurred in connection therewith),
if such securities are sold to underwriters or dealers for public offering
without a subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise than
on the exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of
15
<PAGE>
shares of Common Stock) for a consideration part or all of which shall be other
than cash, the amount of the consideration therefor other than cash deemed to
have been received by the Company shall be the value of such consideration as
determined in good faith by the Board of Directors of the Company, using
customary valuation methods and on the basis of prevailing market values for
similar property or services.
(C) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of shareholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(D) The reclassification of securities of the Company other
than shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (B) of this Section 8(a).
(E) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(b) Upon each adjustment of the Purchase Price pursuant to
this Section 8, the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall be the number derived by multiplying the number
of shares of Common Stock purchasable
16
<PAGE>
immediately prior to such adjustment by the Purchase Price in effect prior to
such adjustment and dividing the product so obtained by the applicable adjusted
Purchase Price.
(c) In case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share (determined as provided in Sections
8(a) and 8(b) and as provided below) less than the Purchase Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, or without consideration (including the
issuance of any such securities by way of dividend or other distribution), the
Purchase Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to the issuance of such options, rights
or warrants, or such convertible or exchangeable securities, as the case may be,
shall be reduced to a price determined by making the computation in accordance
with the provisions of Sections 8(a) and 8(b) hereof, provided that:
(A) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable or that may become issuable under such options, rights
or warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company for such options, rights or warrants; provided, however, that upon
the expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (A) (and for the
purposes of subsection (E) of Section 8(a) hereof) shall be
17
<PAGE>
reduced by the number of shares as to which options, warrants and/or rights
shall have expired, and such number of shares shall no longer be deemed to be
issued and outstanding, and the Purchase Price then in effect shall forthwith be
readjusted and thereafter be the price that it would have been had adjustment
been made on the basis of the issuance only of the shares actually issued plus
the shares remaining issuable upon the exercise of those options, rights or
warrants as to which the exercise rights shall not have expired or terminated
unexercised.
(B) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
termination of the right to convert or exchange such convertible or exchangeable
securities (whether by reason of redemption or otherwise), the number of shares
of Common Stock deemed to be issued and outstanding pursuant to this subsection
(B) (and for the purposes of subsection (E) of Section 8(a) hereof) shall be
reduced by the number of shares as to which the conversion or exchange rights
shall have expired or terminated unexercised, and such number of shares shall no
longer be deemed to be issued and outstanding, and the Purchase Price then in
effect shall forthwith be readjusted and thereafter be the price that it would
have been had adjustment been made on the basis of the issuance only of the
shares actually issued plus the shares remaining issuable upon conversion or
exchange of those convertible or exchangeable securities as to which the
conversion or exchange rights shall not have expired or terminated unexercised.
18
<PAGE>
(C) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in subsection (A) of
this Section 8(c), or in the price per share or ratio at which the securities
referred to in subsection (B) of this Section 8(c) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(d) In case of any reclassification or change of outstanding
shares of Common Stock issuable upon exercise of the Warrants (other than a
change in par value, or from par value to no par value, or from no par value to
par value or as a result of a subdivision or combination), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with a subsidiary of the Company in which merger the Company is
the continuing corporation) and which does not result in any reclassification or
change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants (other than a change in par value, or
from par value to no par value, or from no par value to par value or as a result
of subdivision or combination) or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, then, as a condition of such reclassification, change, consolidation,
merger, sale or conveyance, the Company, or such successor or purchasing
corporation, as the case may be, shall make lawful and adequate provision
whereby the Registered Holder of each Warrant then outstanding shall have the
right thereafter to receive on exercise of such Warrant
19
<PAGE>
the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance and shall forthwith file at the Corporate Office of the Warrant Agent
a statement signed by its Chief Executive Officer, President or a Vice President
and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary evidencing such provision. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Sections 8(a), (b) and (c). The above provisions of
this Section 8(d) shall similarly apply to successive reclassifications and
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
(e) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(d) hereof, continue to express the Purchase Price per
share and the number of shares purchasable thereunder as the Purchase Price per
share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
(f) After each adjustment of the Purchase Price pursuant to
this Section 8, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Purchase Price as so adjusted, (ii) the number of shares
of Common Stock purchasable upon exercise of each Warrant, after such
20
<PAGE>
adjustment, and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate with the Warrant
Agent and cause a brief summary thereof to be sent by ordinary first class mail
to each Registered Holder at his last address as it shall appear on the registry
books of the Warrant Agent. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity thereof except as to
the holder to whom the Company failed to mail such notice, or except as to the
holder whose notice was defective. The affidavit of an officer of the Warrant
Agent or the Secretary or an Assistant Secretary of the Company that such notice
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(g) No adjustment of the Purchase Price shall be made as a
result of or in connection with (A) the issuance or sale of shares of Common
Stock pursuant to options, warrants, stock purchase agreements and convertible
or exchangeable securities outstanding or in effect on the date hereof and on
the terms described in the final prospectus relating to the public offering
contemplated by the Underwriting Agreement; or (B) the issuance or sale of
shares of Common Stock if the amount of said adjustment shall be less than
$0.10, provided, however, that in such case, any adjustment that would otherwise
be required then to be made shall be carried forward and shall be made at the
time of and together with the next subsequent adjustment that shall amount,
together with any adjustment so carried forward, to at least $0.10. In addition,
Registered Holders shall not be entitled to cash dividends paid by the Company
prior to the exercise of any Warrant or Warrants held by them.
21
<PAGE>
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption Date, the
Company may, on 30 days' prior written notice, redeem all, but not less than
all, of the Warrants at five cents ($0.05) per Warrant, provided, however, that
before any such call for redemption of Warrants can take place, the average
closing sale price for the Common Stock as reported by AMEX, if the Common Stock
is then traded on AMEX (or the average closing sale price, if the Common Stock
is then traded on another national securities exchange) shall have equalled or
exceeded $________ [150% of the then exercise price per share] per share
(subject to adjustment) for any twenty (20) trading days within a period of
thirty (30) consecutive trading days ending on the fifth trading day prior to
the date on which the notice contemplated by subsections (b) and (c) below is
given (subject to adjustment in the event of any stock splits or other similar
events as provided in Section 8 hereof).
(b) In case the Company shall exercise its right to redeem all
of the Warrants, it shall give or cause to be given notice to the Registered
Holders of the Warrants, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, at their last address as shall appear
on the records of the Warrant Agent. Any notice mailed in the manner provided
herein shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice. Not less than five (5) business days
prior to the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to National a
similar notice telephonically and confirmed in writing together with a list of
the Registered Holders (including their respective addresses and number of
Warrants beneficially owned) to whom such notice of redemption has been or will
be given.
22
<PAGE>
(c) The notice of redemption shall specify (i) the Redemption
Price, (ii) the Redemption Date, which shall in no event be less than thirty
(30) days after the date of mailing of such notice, (iii) the place where the
Warrant Certificate shall be delivered and the Redemption Price shall be paid,
(iv) if National is engaged as a Warrant solicitation agent, that National shall
receive the commission contemplated by Section 4(b) hereof, and (v) that the
right to exercise the Warrant shall terminate at 5:30 p.m. (New York time) on
the business day immediately preceding the date fixed for redemption. No failure
to mail such notice nor any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption except as to a holder
(a) to whom notice was not mailed or (b) whose notice was defective. An
affidavit of the Warrant Agent or the Secretary or Assistant Secretary of the
Company that notice of redemption has been mailed shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:30
p.m. (New York time) on the business day immediately preceding the Redemption
Date. The Redemption Price payable to the Registered Holders shall be mailed to
such persons at their addresses of record.
(e) The Company shall indemnify National and each person, if
any, who controls National within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising from the
registration statement or prospectus referred to in Section 5(b) hereof to the
same extent and with the same effect (including the provisions regarding
contribution) as the provisions pursuant
23
<PAGE>
to which the Company has agreed to indemnify National contained in Section 7 of
the Underwriting Agreement.
(f) Five business days prior to the Redemption Date, the
Company shall furnish to National (i) an opinion of counsel to the Company,
dated such date and addressed to National, and (ii) a "cold comfort" letter
dated such date addressed to National, signed by the independent public
accountants who have issued a report on the Company's financial statements
included in such registration statement, in each case covering substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company and National, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder, be
deemed to make any representations as to the validity or value or authorization
of the Warrant Certificates or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty
or responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price or the Redemption Price provided in
this Agreement, or to determine whether any fact exists which may require any
such adjustments, or with respect to the nature
24
<PAGE>
or extent of any such adjustments, when made, or with respect to the method
employed in making the same. It shall not (i) be liable for any recital or
statement of fact contained herein or for any action taken, suffered or omitted
by it in reliance on any Warrant Certificate or other document or instrument
believed by it in good faith to be genuine and to have been signed or presented
by the proper party or parties, (ii) be responsible for any failure on the part
of the Company to comply with any of its covenants and obligations contained in
this Agreement or in any Warrant Certificate, or (iii) be liable for any act or
omission in connection with this Agreement except for its own negligence, bad
faith or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or for National) and
shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.
(d) Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board of Directors, Chief Executive Officer,
President or any Vice President (unless other evidence in respect thereof is
herein specifically prescribed). The Warrant Agent shall not be liable for any
action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand reasonably believed
by it to be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless from and against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties
25
<PAGE>
and powers hereunder except losses, expenses and liabilities arising as a result
of the Warrant Agent's negligence, bad faith or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities arising as
a result of the Warrant Agent's own gross negligence or willful misconduct),
after giving 30 days' prior written notice to the Company. At least 15 days
prior to the date such resignation is to become effective, the Warrant Agent
shall cause a copy of such notice of resignation to be mailed to the Registered
Holder of each Warrant Certificate at the Company's expense. Upon such
resignation, or any inability of the Warrant Agent to act as such hereunder, the
Company shall appoint in writing a new warrant agent. If the Company shall fail
to make such appointment within a period of 15 days after it has been notified
in writing of such resignation by the resigning Warrant Agent, then the
Registered Holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a new warrant agent. Any new warrant agent,
whether appointed by the Company or by such a court, shall be a bank or trust
company having a capital and surplus, as shown by its last published report to
its stockholders, of not less than $10,000,000 or a stock transfer company.
After acceptance in writing of such appointment by the new warrant agent is
received by the Company, such new warrant agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
herein as the Warrant Agent, without any further assurance, conveyance, act or
deed; but if for any reason it shall be necessary or expedient to execute and
deliver any further assurance, conveyance, act or deed, the same shall be done
at the expense of the Company and shall be legally and validly executed and
delivered by the resigning Warrant Agent. Not later than the effective date of
any such appointment the Company shall file notice thereof with the resigning
Warrant Agent and
26
<PAGE>
shall forthwith cause a copy of such notice to be mailed to the Registered
Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company, the
Representative and to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effect as though it were not Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years
from the date of exercise any Warrant Certificate received by it upon such
exercise.
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental agreement make
any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained; or (ii) that they may
deem necessary or desirable and which shall not adversely
27
<PAGE>
affect the interests of the holders of Warrant Certificates; provided, however,
that this Agreement shall not otherwise be modified, supplemented or altered in
any respect except with the consent in writing of the Registered Holders
representing not less than 66-2/3% of the Warrants then outstanding; provided,
further, that no change in the number or nature of the securities purchasable
upon the exercise of any Warrant, or to increase the Purchase Price therefor or
to accelerate the Warrant Expiration Date, shall be made without the consent in
writing of the Registered Holder of the Warrant Certificate representing such
Warrant, other than such changes as are presently specifically prescribed by
this Agreement as originally executed. In addition, this Agreement may not be
modified, amended or supplemented without the prior written consent of National,
other than to cure any ambiguity or to correct any provision which is
inconsistent with any other provision of this Agreement or to make any such
change that is necessary or desirable and which shall not adversely affect the
interests of National and except as may be required by law.
SECTION 12. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class registered or certified mail, postage prepaid, as follows: if
to the Registered Holder of a Warrant Certificate, at the address of such holder
as shown on the registry books maintained by the Warrant Agent; if to the
Company at 1675 Broadway, Suite 3500, New York, NY 10019, Attention: Jonathan M.
Charry, President and CEO, or at such other address as may have been furnished
to the Warrant Agent in writing by the Company; and if to the Warrant Agent, at
its Corporate Office. Copies of any notice delivered pursuant to this Agreement
shall also be delivered to National Securities Corporation, 1001 Fourth Avenue,
Suite 2200, Seattle,
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Washington 98154-1100, Attention: General Counsel, or at such other address as
may have been furnished to the Company and the Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, National, the Warrant Agent and their respective successors and assigns
and the holders from time to time of Warrant Certificates or any of them.
Nothing in this Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim, in equity or at law, or to impose upon
any other person any duty, liability or obligation.
SECTION 15. Termination.
This Agreement shall terminate at the close of business on the
Expiration Date of all of the Warrants or such earlier date upon which all
Warrants have been exercised or redeemed, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 10
hereof shall survive such termination.
SECTION 16. Counterparts.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
[SEAL]
QUIETPOWER SYSTEMS, INC.
By:
------------------------------
Name:
Title:
Attest:
By:
------------------------------
Name:
Title:
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
As Warrant Agent
By:
------------------------------
Name:
Title:
NATIONAL SECURITIES CORPORATION
By:
------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
No. W VOID AFTER _________, 2002
___________ WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
QUIETPOWER SYSTEMS, INC.
CUSIP ____
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, $.01 par
value, of QuietPower Systems, Inc., a Delaware corporation (the "Company"), at
any time between ______, 1997 (the "Initial Warrant Exercise Date"), and the
Expiration Date (as hereinafter defined) upon the presentation and surrender of
this Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of Continental Stock Transfer & Trust Company,
as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment
of $_____ per share of Common Stock, [150% of the initial public offering price
of the Common Stock] subject to adjustment (the "Purchase Price"), in lawful
money of the United States of America in cash or by check made payable to the
Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued pursuant
to and are subject in all respects to the terms and conditions set forth in the
Warrant Agreement (the "Warrant Agreement"), dated ______, 1997 [date of the
Prospectus], by and among the Company, National Securities Corporation
("National") and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
A-1
<PAGE>
The term "Expiration Date" shall mean 5:30 p.m. (New York time) on
____________, 2002 [five (5) years after the Initial Warrant Exercise Date]. If
each such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:30 p.m.
(New York time) on the next following day which in the State of New York is not
a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, while any of the Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered Holder
exercising this Warrant. This Warrant shall not be exercisable by a Registered
Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof
by the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may
be redeemed at the option of the Company, at a redemption price of $0.05 per
Warrant, at any time commencing after ______________, 1998 [13 months after the
date of the Prospectus], provided that the average closing sale price for the
Common Stock as reported by the American Stock Exchange ("AMEX"), if the Common
Stock is then traded on the AMEX (or the average closing sale price, if the
Common Stock is then traded on another national securities exchange), shall have
equalled or exceeded $_____ [150% of the then exercise price per share] per
share (subject to adjustment) for any twenty (20) trading days within a period
of thirty (30) consecutive trading days ending on the fifth trading day prior to
the Notice of Redemption, as defined below (subject to adjustment in the event
of any stock splits or other similar events). Notice of redemption (the "Notice
of Redemption") shall be given not later than the thirtieth day before the date
fixed for redemption, all as provided in the Warrant Agreement. On and after the
date fixed for redemption, the Registered Holder shall have no rights with
respect to the Warrants except to receive the $0.05 per Warrant upon surrender
of this Warrant Certificate.
A-2
<PAGE>
Under certain circumstances, National may be entitled to receive an
aggregate of five percent (5%) of the Purchase Price of the Warrants represented
hereby.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
A-3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be duly executed, manually or in facsimile by two of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
QUIETPOWER SYSTEMS, INC.
[SEAL]
By:
------------------------------
Name:
Title:
By:
------------------------------
Secretary
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
as Warrant Agent
By:
------------------------------
Name:
Title:
A-4
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise ____________________ Warrants represented by this Warrant Certificate,
and to purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
___________________________
___________________________
___________________________
___________________________
(please print or type name and address)
and be delivered to
___________________________
___________________________
___________________________
___________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
A-5
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by
National Securities Corporation. |_|
2. The exercise of this Warrant was solicited by
__________________________. |_|
3. The exercise of this Warrant was not
solicited. |_|
Dated:__________________ X__________________________________
___________________________________
___________________________________
Address
___________________________________
Social Security or Taxpayer
Identification Number
___________________________________
Signature Guaranteed
___________________________________
A-6
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ___________________, hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
___________________________
___________________________
___________________________
___________________________
(please print or type name and address)
__________________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
__________________________ Attorney to transfer this Warrant Certificate on the
books of the Company, with full power of substitution in the premises.
Dated:____________________ X____________________________
Signature Guaranteed
_____________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
A-7
<PAGE>
Exhibit 4.4
OHS DRAFT
5/20/97
[FORM OF REPRESENTATIVE'S WARRANT AGREEMENT]
[SUBJECT TO ADDITIONAL REVIEW]
- --------------------------------------------------------------------------------
QUIETPOWER SYSTEMS, INC.
AND
NATIONAL SECURITIES CORPORATION
----------
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of ________, 1997
- --------------------------------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1997 between
QUIETPOWER SYSTEMS, INC., a Delaware corporation (the "Company"), and NATIONAL
SECURITIES CORPORATION (hereinafter referred to variously as the "Holder" or the
"Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative warrants
("Warrants") to purchase up to an aggregate of 200,000 shares of Common Stock,
$.01 par value, of the Company and/or 200,000 redeemable common stock purchase
warrants of the Company ("Redeemable Warrants"), each Redeemable Warrant to
purchase one additional share of Common Stock; and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the several Underwriters listed therein to act as the Representative
in connection with the Company's proposed public offering of up to 2,000,000
shares of Common Stock and 2,000,000 Redeemable Warrants (the "Public Warrants")
at an initial public offering price of $____ per share of Common Stock and $____
per Public Warrant; and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate twenty dollars ($20.00), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
1. Grant. The Representative (and/or its designees) is hereby granted the
right to purchase, at any time from _______, 1998 [one year from the effective
date of the Registration Statement], until 5:30 P.M., New York time, on _______,
2002 [five years from the effective date of the Registration Statement], up to
an aggregate of 200,000 shares of Common Stock and/or 200,000 Redeemable
Warrants at an initial exercise price (subject to adjustment as provided in
Section 8 hereof) of $____ per share of Common Stock [120% of the initial public
offering price per share] and $____ per Redeemable Warrant [120% of the initial
public offering price per Redeemable Warrant], subject to the terms and
conditions of this Agreement. One Redeemable Warrant is exercisable to purchase
one additional share of Common Stock at an initial exercise price of $_____
[150% of the initial public offering price per share] from ______, 1998 (one
year from the effective date of the Registration Statement) until 5:30 p.m. New
York time on _____, 2002 [five years from the effective date of the Registration
Statement], at which time the Redeemable Warrants shall expire. Except as set
forth herein, the shares of Common Stock and the Redeemable Warrants issuable
upon exercise of the Warrants are in all respects identical to the shares of
Common Stock and the Public Warrants being purchased by the Underwriters for
resale to the public pursuant to the terms and provisions of the Underwriting
Agreement. The shares of Common Stock and the Redeemable Warrants issuable upon
exercise of the Warrants are sometimes hereinafter referred to collectively as
the "Securities."
- 2 -
<PAGE>
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
ss.3.1 Method of Exercise. The Warrants initially are exercisable at an
aggregate initial exercise price (subject to adjustment as provided in Section 8
hereof) per share of Common Stock and Redeemable Warrant set forth in Section 6
hereof payable by certified or official bank check in New York Clearing House
funds, subject to adjustment as provided in Section 8 hereof. Upon surrender of
a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the shares of Common Stock and/or Redeemable Warrants purchased at the
Company's principal executive offices in New York, New York (presently located
at 460 West 34th Street, New York, NY 10001) the registered holder of a Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the shares of Common Stock so purchased and a certificate or
certificates for the Redeemable Warrants so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder thereof, in whole or in part (but not as to fractional shares of the
Common Stock and Redeemable Warrants underlying the Warrants). In the event the
Company redeems all of the Public Warrants (other than the Redeemable Warrants
underlying the Warrants), then the Warrants may only be exercised if such
exercise is accompanied by the simultaneous exercise of the Redeemable
Warrant(s) underlying the Warrants being so exercised. Warrants may be exercised
to purchase all or part of the shares of Common Stock together with an equal or
unequal number of the Redeemable Warrants represented thereby. In the case of
the purchase
- 3 -
<PAGE>
of less than all the shares of Common Stock and/or Redeemable Warrants
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the shares of Common Stock
and/or Redeemable Warrants purchasable thereunder.
ss.3.2 Exercise by Surrender of Warrant. In addition to the method of
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in full or in part by surrendering
the Warrant Certificate in the manner specified in Section 3.1 in exchange for
the number of shares of Common Stock equal to the quotient derived from dividing
the numerator (x) an amount equal to the difference between (A) the sum of (1)
the number of shares of Common Stock as to which the Warrants are being
exercised multiplied by the per share Market Price, and (2) the number of
Redeemable Warrants as to which the Warrants are being exercised multiplied by
the per Redeemable Warrant Market Price, and (3) the number of shares of Common
Stock issuable upon exercise of the Redeemable Warrants underlying the Warrants
being exercised multiplied by the per share Market Price, and (B) the sum of (1)
the number of Warrants which are being exercised multiplied by the Exercise
Price and (2) the number of Redeemable Warrants included in the Warrants which
are being exercised multiplied by the exercise price per Redeemable Warrant (as
calculated pursuant to the Redeemable Warrant Agreement (hereinafter defined))
as then in effect, by the denominator (y) the per share Market Price of the
Common Stock. Solely for the purposes of this paragraph, Market Price shall be
calculated either (i) on the date on which the form of election attached hereto
is deemed to have been sent to the Company pursuant to Section 14 hereof
("Notice
- 4 -
<PAGE>
Date") or (ii) as the average of the Market Prices for each of the five trading
days preceding the Notice Date, whichever of (i) or (ii) is greater.
ss.3.3 Definition of Market Price. As used herein, the phrase "Market
Price" at any date shall be deemed to be (i) when referring to the Common Stock,
the last reported sale price, or, in case no such reported sale takes place on
such day, the average of the last reported sale prices for the last three (3)
trading days, in either case as officially reported by the American Stock
Exchange ("AMEX") or the principal securities exchange on which the Common Stock
is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on AMEX or any national securities exchange or q
<PAGE>
EXHIBIT 5
BRESLOW & WALKER, LLP
767 THIRD AVENUE
NEW YORK, NEW YORK 10017
June 17, 1997
Board of Directors
QuietPower Systems, Inc.
460 West 34th Street
New York, New York 10001
Gentlemen:
It is our opinion that the securities being registered with the Securities
and Exchange Commission pursuant to Amendment No. 1 to the Registration
Statement of QuietPower Systems, Inc. on Form SB-2 will, when sold, be legally
issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the aforesaid
Registration Statement and further consent to the reference made to us under the
caption "Legal Matters" in the Prospectus constituting part of such Registration
Statement.
Very truly yours,
/s/ BRESLOW & WALKER, LLP
Breslow & Walker, LLP
<PAGE>
Exhibit 10.27
CONVERSION AND SUBSCRIPTION AGREEMENT
This CONVERSION AND SUBSCRIPTION AGREEMENT, dated as of the 13th day of
June, 1997, by and between QUIETPOWER SYSTEMS, INC. (formerly Active Acoustical
Solutions, Inc.), a Delaware corporation, with an address at 460 West 34th
Street, New York, New York 10001 (the "Company"), and BALTIMORE GAS AND ELECTRIC
COMPANY, a Maryland corporation, with an address at 39 West Lexington Street,
Baltimore, Maryland 21203 ("BGE").
W I T N E S S E T H :
WHEREAS, BGE, NCT Power, Inc. (a Delaware corporation which has since been
dissolved), and Noise Cancellation Technologies, Inc. ("NCT"), are parties to a
Research Agreement dated as of December 21, 1990, and amended on November 10,
1992 (the "NCT Research Agreement"), pursuant to which BGE is to receive
royalties and/or other forms of consideration under Section 4(b) thereof; and
WHEREAS, the Company and BGE are, together with NCT, also parties to a
Participation Agreement, dated as of November 1993 (the "Participation
Agreement"), pursuant to which BGE is to receive royalties, product discounts
and/or other forms of consideration under Section 3 thereof; and
WHEREAS, the Company and BGE are also parties to a Research Agreement,
dated as of October 30, 1994 (together with the NCT Research Agreement and the
Participation Agreement, the "Agreements"), pursuant to which BGE is to receive
royalties, product discounts and/or other forms of consideration under Section 5
thereof; and
WHEREAS, the Company and NCT are parties to a Master Agreement, dated as
of March 27, 1995 (as amended, the "Master Agreement"), pursuant to which the
Company has agreed to assume all of NCT's obligations under the NCT Research
Agreement and the Participation Agreement.
NOW, THEREFORE, for and in consideration of the promises and the mutual
covenants hereinafter set forth, the parties hereto do hereby agree as follows:
1. SUBSCRIPTION FOR THE SECURITIES
1.1 Subject to the terms and conditions hereinafter set forth, BGE
hereby agrees to accept 80,000 shares of the Company's Common Stock, par value
$.01 per share (the "Shares"), in satisfaction of all of BGE's rights to receive
royalties, product discounts and/or other forms of consideration under the
Agreements (the "Purchase Price"), and the Company, upon its execution hereof,
agrees to give such Shares to BGE in consideration of the Purchase Price.
<PAGE>
2. REPRESENTATIONS BY BGE
2.1 BGE represents that it is an "accredited investor" as such term
is defined in Rule 501 of Regulation D promulgated under the United States
Securities Act of 1933, as amended (the "Act").
2.2 BGE acknowledges receipt of the Company's Registration Statement
on Form SB-2, as filed with the Securities and Exchange Commission ("SEC") on
May 8, 1997, and all other information regarding the Company which it has
requested or desired to know; that all documents which could be reasonably
provided have been made available for its inspection and review; and that BGE
has been afforded the opportunity to ask questions of and receive answers from
duly authorized officers or other representatives of the Company concerning the
Company and an investment therein, and any additional information which it has
requested.
2.3 BGE acknowledges that the disclosure related to the sale of the
Shares made hereby has not been reviewed by the SEC or by any other governmental
authority. BGE represents that the Shares are being purchased for its own
account, for investment and not for distribution or resale to others. BGE agrees
that it will not sell or otherwise transfer the Shares unless they are
registered under the Act or unless an exemption from such registration is
available.
2.4 BGE understands that the sale of the Shares has not been
registered under the Act and, therefore, the Shares may have to be held
indefinitely unless subsequently registered under the Act or an exemption from
such registration is available in the opinion of counsel to the Company. In
addition, BGE agrees and acknowledges that the certificate for the Shares shall
bear a restrictive legend in substantially the following form:
"The securities represented by this certificate have been acquired
for investment and have not been registered pursuant to the
Securities Act of 1933, as amended, or any applicable state
statutes. Such securities may not be sold, transferred, pledged,
hypothecated or otherwise disposed of without either an effective
registration statement relating to such disposition or an opinion of
counsel satisfactory to QuietPower Systems, Inc. that the securities
may be so disposed of without being registered."
2.5 BGE consents that the Company may, if it desires, permit the
transfer of the Shares out of its name only when its request for transfer is
accompanied by an opinion of counsel for the Company that neither the sale nor
the proposed transfer results in a violation of the Act or any applicable state
"blue sky" laws (collectively "Securities Laws"). BGE agrees to hold the Company
and its directors, officers and controlling persons and their respective heirs,
representatives, successors and assigns harmless and to indemnify them against
all liabilities, costs and expenses incurred by them as a result of any sale or
distribution by BGE in violation of any Securities Laws.
2
<PAGE>
3. REPRESENTATIONS BY THE COMPANY
The Company represents and warrants to BGE as follows:
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power to conduct the business which it proposes to conduct.
(b) The Shares have been duly and validly authorized and, upon
issuance, will be duly and validly issued and fully paid and non-assessable. The
Shares upon issuance to BGE are free and clear of any liens and encumbrances or
restrictions other than the lock-up period restriction set forth in the lock-up
letter described in Section 5.1 and the Securities Laws restrictions described
in Section 2.4.
4. REGISTRATION
4.1 If the Company registers any of its securities under the Act,
other than a registration solely to implement an employee benefit plan, a
transaction to which Rule 145 under the Act is applicable, or any other form of
registration in which the Shares cannot be included under the Act and the Rules
thereunder, the Company shall advise BGE by written notice at least 20 days
prior to the filing of any such registration statement or post-effect amendment
thereto, and, upon the written request of BGE, the Company shall cause, subject
to Section 4.2 below, the Shares to be registered under the Act and qualified
for sale under such Securities Laws as BGE shall reasonably request.
4.2 The registration rights granted hereunder shall in all cases be
subject to (a) the priority rights granted by the Company to other parties
holding registration rights for such registration which are listed on Exhibit
One, and (b) the opinion of the underwriter managing such registration, if any,
that the distribution of all or a portion of the Shares requested to be included
in such registration statement would materially adversely affect the
distribution of securities by the Company for its own account, in either of
which cases BGE hereby agrees to waive its rights to include the Shares (or such
portion thereof as to which the underwriter objects) in any such registration
statement.
5. MISCELLANEOUS
5.1 Simultaneously herewith, BGE is executing the lock-up letter in
the form attached hereto as Exhibit Two.
5.2 BGE acknowledges that pursuant to the Master Agreement, the
Company has assumed all of the obligations owed by NCT to BGE under the
Agreements and BGE hereby consents to such assumption.
3
<PAGE>
5.3 Any notice or other communication given hereunder shall be
deemed sufficient if in writing and sent by overnight delivery or facsimile,
addressed to the Company Attention: President and BGE Attention: DA Brune, Chief
Financial Officer, at the addresses indicated on the first page of this
Agreement or the following facsimile numbers: Company - (212) 967-8952 and BGE -
(410) 234-5643. Notices shall be deemed to have been given on the business day
following the date on which the notice is sent.
5.4 This Agreement shall not be changed, modified or amended except
by a writing signed by the parties to be charged, and this Agreement may not be
discharged except by performance in accordance with its terms or by a writing
signed by the party to be charged.
5.5 This Agreement shall be binding upon and inure to the benefit of
the parties hereto and to their respective heirs, legal representatives,
successors and assigns. This Agreement sets forth the entire agreement and
understanding between the parties as to the subject matter thereof and merges
and supersedes all prior discussions, agreements and understandings of any and
every nature among them.
5.6 This Agreement and its validity, construction and performance
shall be governed in all respects by the laws of the State of New York.
5.7 This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
BALTIMORE GAS AND ELECTRIC
COMPANY
By: /s/ David A. Brune
--------------------------
Title: Vice President
QUIETPOWER SYSTEMS, INC.
BY: /s/ Eric W. Jacobson
---------------------------
Name: Eric W. Jacobson
Title: Vice President
4
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Registration Statement on Form SB-2
Amendment No. 1 of our report dated April 29, 1997 based on our audits of the
financial statements of QuietPower Systems, Inc. as of December 31, 1996 and
each of the years in the two-year period ended December 31, 1996. We also
consent to the reference to our firm under the caption "Experts," "Selected
Financial Data" and "Summary Financial Data."
Richard A. Eisner & Company, LLP
New York, New York
June 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 6,000
<SECURITIES> 0
<RECEIVABLES> 99,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 111,000
<PP&E> 41,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 645,000
<CURRENT-LIABILITIES> 2,227,000
<BONDS> 0
0
1,059,000
<COMMON> 7,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 645,000
<SALES> 51,000
<TOTAL-REVENUES> 51,000
<CGS> 76,000
<TOTAL-COSTS> 586,000
<OTHER-EXPENSES> 510,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,000
<INCOME-PRETAX> (624,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (624,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (624,000)
<EPS-PRIMARY> ($0.39)
<EPS-DILUTED> ($0.39)
</TABLE>
