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EXHIBIT B
SUBSCRIPTION AGREEMENT
By and Between
PRECISION SYSTEMS, INC.,
A DELAWARE CORPORATION,
and
RMS LIMITED PARTNERSHIP,
A NEVADA LIMITED PARTNERSHIP,
Dated as of September 30, 1997
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TABLE OF CONTENTS
Page
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ARTICLE 1 Purchase of Securities............................................................ 1
1.1 Subscription ................................................................. 1
1.2 Purchase Price................................................................ 1
ARTICLE 2 Closing........................................................................... 2
2.1 Closing of Subscription....................................................... 2
ARTICLE 3 Representations and Warranties.................................................... 2
3.1 Investor Representations and Warranties....................................... 2
3.2 Company Representations and Warranties........................................ 7
ARTICLE 4 Registration Rights...............................................................10
4.1 Registration..................................................................10
4.2 [Intentionally Omitted].......................................................10
4.3 Precedence of Registration Rights.............................................10
4.4 Registration Procedures.......................................................10
ARTICLE 5 Miscellaneous.....................................................................17
5.1 Indemnity.....................................................................17
5.2 Modification..................................................................17
5.3 Notices.......................................................................17
5.4 Counterparts..................................................................18
5.5 Binding Effect................................................................18
5.6 Entire Agreement..............................................................18
5.7 Assignability.................................................................18
5.8 Governing Law; Jurisdiction and Choice of Forum...............................18
5.9 Pronouns......................................................................18
5.10 Severability..................................................................18
5.11 Waiver........................................................................19
5.12 Further Assurances............................................................19
Exhibit
Exhibit A -- Form of Note
Exhibit B -- Warrant Certificate
Exhibit B-1 -- Loan Agreement
- i -
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Exhibit C -- SEC Filings
Exhibit D -- Risk Factors
- ii -
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SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement") is made and entered into as
of the 30th day of September, 1997 by and among Precision Systems, Inc., a
Delaware corporation (the "Company"), with its principal office at ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇, ▇▇. ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇ and RMS Limited Partnership, a Nevada
limited partnership ("Subscriber"), with its principal office at ▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇.
WITNESSETH
WHEREAS the Company desires to issue units (the "Units") each consisting of
a $2,000,000 principal amount 8% unsecured promissory note of the Company due
and payable on January 1, 1999 (each a "Note" and collectively the "Notes") and
a warrant (the "Warrant") to purchase up to 275,000 shares of Common Stock, $.01
par value per share ("Common Stock"), all on the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and in further
consideration of the mutual covenants, promises and agreements hereinafter set
forth, it has been and IT IS HEREBY AGREED AS FOLLOWS:
ARTICLE I
PURCHASE OF SECURITIES
1.1 Subscription. The Subscriber, intending to be legally bound, hereby
irrevocably subscribes for and agrees to purchase one Unit consisting of a Note
and a Warrant. The Note shall be evidenced by a promissory note in the form of
Exhibit A attached hereto and the Subscriber shall have the rights of a Lender
as such term is defined in the Loan Agreement attached hereto as Exhibit B-1.
The Warrant shall entitle the holder thereof to the rights set forth in that
certain Warrant Certificate attached hereto as Exhibit B. For the purpose of
this Agreement, shares of Common Stock issuable upon the exercise of the Warrant
shall hereinafter be referred to as the "Warrant Shares" and the Notes, the
Warrant and the Warrant Shares shall hereinafter be referred to as the
"Securities."
1.2 Purchase Price. The Company agrees to issue and sell to the Subscriber
the Unit for a purchase price of two million dollars ($2,000,000) (the
"Subscription Price"). Payment of the Subscription Price shall be made by wire
transfer or check payable to and delivered to the Company or, if by wire
transfer in accordance with the instructions of the Company,
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together with an executed copy of this Agreement and any other documents
required to be executed under this Agreement.
ARTICLE II
CLOSING
2.1 Closing of Subscription. The closing of the purchase and sale of the
Unit (the "Closing") shall take place at the offices of the Company on such date
as is mutually agreed to by the Company and the Subscriber. At the Closing, the
Company shall deliver to the Subscriber the Note and the Warrant, duly
registered in the Subscriber's name against payment in full by the Subscriber of
the Subscription Price against execution by the Subscriber of this Agreement and
the Loan Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Investor Representations and Warranties. The Subscriber hereby
acknowledges, represents and warrants to the Company as follows:
(a) The Subscriber is acquiring the Securities for its own account
as principal, not as a nominee or agent, for investment purposes only, and not
with a view to, or for, resale, distribution or fractionalization thereof in
whole or in part and no other person has a direct or indirect beneficial
interest in the Securities. Further, the Subscriber does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person with respect to any of the
Securities for which it is subscribing.
(b) The Subscriber has full power and authority to enter into this
Agreement, the execution and delivery of this Agreement has been duly
authorized, if applicable, and this Agreement constitutes a valid and legally
binding obligation of the Subscriber.
(c) The Subscriber acknowledges its understanding that the offering
and sale of the Securities is intended to be exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), by virtue of Section
4(2) of the Securities Act and the provisions of Regulation D promulgated
thereunder ("Regulation D"). In furtherance thereof, the Subscriber represents
and warrants to, and agrees with, the Company and its affiliates as follows:
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(i) The Subscriber realizes that the basis for the exemption
may not be present if, notwithstanding any representations and/or
warranties to the contrary herein contained, the Subscriber has in mind
merely acquiring the Securities for a fixed or determinable period in the
future, or for a market rise, or for sale if the market does not rise;
(ii) The Subscriber has the financial ability to bear the
economic risk of its investment, has adequate means for providing for its
current needs and personal contingencies and has no need for liquidity with
respect to its investment in the Company; and
(iii) The Subscriber has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits
and risks of an investment in the Securities. If other than an individual,
the Subscriber also represents it has not been organized for the purpose of
acquiring the Securities.
(d) The Subscriber is an "accredited investor," as that term is
defined in Rule 501 of Regulation D.
(e) The Subscriber:
(i) Has been furnished with those documents identified on
Exhibit C which have been filed by the Company with the Securities and
Exchange Commission (the "SEC Filings") and any and all documents which may
have been made available upon request for a reasonable time prior to the
date hereof, and the Subscriber has carefully read and understands and has
evaluated the risks set forth under "Risk Factors" attached hereto as
Exhibit D and the considerations described in subsections (ii) and (iii)
below relating to the information contained in the SEC Filings.
(ii) Has been provided an opportunity for a reasonable time
prior to the date hereof to obtain additional information concerning the
offering of the Securities, the Company and all other information to the
extent the Company possesses such information or can acquire it without
unreasonable effort or expense;
(iii) Has been given the opportunity for a reasonable time prior
to the date hereof to ask questions of, and receive answers from, the
Company or its representatives concerning the terms and conditions of the
offering of the Securities and other matters pertaining to an investment in
the Securities, and has been given the opportunity for a reasonable time
prior to the date hereof to obtain such additional information necessary to
verify the accuracy of the information which was provided in order for them
to evaluate the merits and risks of a purchase of the Securities to the
extent the Company possesses such information or can acquire it without
unreasonable
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effort or expense and has agreed that it will keep confidential any
non-public information received as part of its investigation referred to in
subsections (i) and (ii) and this subsection (iii);
(iv) Has not been furnished with any oral representation or
oral information in connection with the offering of the Securities
which is not contained in the SEC Filings; and
(v) Has determined that the Securities are a suitable
investment for the Subscriber and that at this time the Subscriber
could bear a complete loss of such investment.
(f) The Subscriber is not relying on any statements or
representations made by the Company or its affiliates with respect to economic
considerations involved in an investment in the Securities. Each Subscriber is
capable of evaluating the merits and risks of an investment in the Securities on
the terms and conditions set forth herein.
(g) The Subscriber will not sell or otherwise transfer the
Securities without registration under the Securities Act or an exemption
therefrom and the Subscriber fully understands and agrees that it must bear the
economic risk of its purchase because, among other reasons, the Securities have
not been registered under the Securities Act or under the securities laws of any
state and, therefore, cannot be resold, pledged, assigned or otherwise disposed
of unless they are subsequently registered under the Securities Act and under
the applicable securities laws of such states or unless exemptions from such
registration requirements are available. In particular, the Subscriber is aware
that the Securities are "restricted securities," as such term is defined in Rule
144 promulgated under the Securities Act ("Rule 144"), and they may not be sold
pursuant to Rule 144 unless all of the conditions of Rule 144 are met. The
Subscriber also understands that, except as otherwise provided herein, the
Company is under no obligation to register the Securities on its behalf or to
assist him in complying with any exemption from the registration requirements of
the Securities Act or applicable state securities laws. The Subscriber further
understands that sales or transfers of the Securities are further restricted by
state securities laws and the provisions of this Agreement.
(h) No representations or warranties have been made to the
Subscriber by the Company, or any officer, employee, agent, affiliate or
subsidiary of the Company, other than the representations of the Company
contained herein, and in subscribing for Securities the Subscriber is not
relying upon any representations other than those contained herein or in the SEC
Filings.
(i) Any information which the Subscriber has heretofore furnished or
is simultaneously herewith furnishing to the Company with respect to its
financial position and business experience is correct and complete as of the
date of this Agreement and, if there
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should be any material change in such information prior to the Closing, it will
immediately furnish revised or corrected information to the Company.
(j) The Subscriber understands and agrees that the certificates
representing the Warrant and the Warrant Shares shall bear the following legend
until (i) such securities shall have been registered under the Securities Act
and effectively been disposed of in accordance with the registration statement;
or (ii) in the opinion of counsel for the Company such securities may be sold
without registration under the Securities Act as well as any applicable "Blue
Sky" or similar state securities laws:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND THEY MAY NOT BE OFFERED, SOLD,
PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS BECOME EFFECTIVE
AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (ii) PURSUANT TO A
SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT BUT ONLY UPON
A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE
CORPORATION, OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE CORPORATION,
THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS
OF THE SECURITIES ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR OTHER STATE
SECURITIES LAW.
(k) The Subscriber, if an individual, is a citizen of the United
States, and is at least 21 years of age, or if a partnership, corporation or
trust, the members, shareholders or beneficiaries thereof are all citizens of
the United States and each is at least 21 years of age. The address set forth
below is the Subscriber's correct principal home address, or if the Subscriber
is other than an individual, the Subscriber's correct principal office and the
Subscriber has no present intention of changing such address.
(1) The Subscriber understands that an investment in the Securities
is a speculative investment which involves a high degree of risk of loss of its
entire investment.
(m) The Subscriber's overall commitment to investments which are not
readily marketable is not disproportionate to the Subscriber's net worth, and an
investment in the Securities will not cause such overall commitment to become
excessive.
(n) The Subscriber has not retained any finder, broker, agent,
financial advisor or other intermediary in connection with the transactions
contemplated by this Agreement and agrees to indemnify and hold harmless the
Company from liability for any compensation to any such intermediary retained by
the Subscriber and the fees and expenses of defending against such liability or
alleged liability.
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(o) The Subscriber acknowledges that this offering of Securities may
involve tax consequences and that the contents of the SEC Filings do not contain
tax advice or information. The Subscriber acknowledges that it must retain its
own professional advisors to evaluate the tax and other consequences of an
investment in the Securities.
(p) The Subscriber is duly organized, validly existing, and in good
standing under the laws of its jurisdiction of formation, is duly qualified to
conduct business under the laws of each jurisdiction in which the nature of the
business transacted by it requires such qualification or where failure to so
qualify would have a material adverse effect upon it or its assets or
properties, and has all requisite corporate power and authority to own and
operate its assets and properties and carry on its business as is being or is
contemplated to be conducted.
(q) The execution and delivery of this Agreement and the performance
of the Subscriber's obligations hereunder, including without limitation the
payment of the purchase price in the manner contemplated herein has been duly
and validly authorized by the taking of all requisite corporate action of the
Subscriber, and does not constitute a breach of or violate, nor create an event
of default under, any indenture, mortgage, deed of trust, fiduciary duty toward
any other person or entity, contract, agreement, certificate of incorporation,
bylaw, order, judgment, or decree to which the Subscriber or any of its
principals is a party or by which the Subscriber or any of its principals or
assets are bound. When executed and delivered by the Subscriber, this Agreement
will constitute a valid and binding obligation of the Subscriber, enforceable
against the Subscriber in accordance with the terms hereof, except as such
enforcement may be limited by bankruptcy, insolvency, or other similar laws
affecting the enforcement of creditors' rights generally or by general
principles of equity.
(r) To the Subscriber's best knowledge, no consents, approvals,
authorizations, expiration of any statutory waiting periods, or orders of any
court or government agency relating to the Subscriber or its business is
required as a condition of the Subscriber's purchase of the Securities in the
manner contemplated herein, and receipt of the Securities in exchange therefor,
or the execution and deliver of this Agreement or consummation of the
transactions contemplated herein.
(s) To the Subscriber's best knowledge, there is no pending or
threatened litigation, injunction, action, investigation, or other proceeding
against it or to which it is a party or by which it or any of its principals,
properties, or assets is or may be affected seeking to enjoin its execution,
delivery, or performance of its obligations under this Agreement or which, if
adversely determined, either individually or in the aggregate, would have a
material adverse effect upon the Subscriber, the Subscriber's ability to conduct
its business as it is being or contemplated to be conducted, or the Subscriber's
ability to perform its obligations hereunder; and there is no judgment, decree,
injunction, rule, or order of any governmental
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authority or arbitrator outstanding against the Subscriber having, or which,
insofar as reasonably can be foreseen, in the future would have, any such
effect.
(t) The foregoing representations, warranties and agreements shall
survive the execution of this Agreement.
3.2 Company Representations and Warranties. The Company hereby
represents and warrants to the Subscriber as follows:
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, has or will have
on or prior to Closing all requisite corporate power and authority (i) to own
and operate its properties and assets and to carry on its business as now
conducted; (ii) to execute and deliver this Agreement; (iii) to issue and sell
the Shares and the Warrant; (iv) upon the conversion of the Warrant to issue
shares of Common Stock; and (v) to carry out the provisions of this Agreement.
(b) All corporate action on the part of the Company, its officers
and directors necessary for the authorization, execution and delivery of this
Agreement, the performance of all obligations of the Company hereunder at the
Closing, and the authorization, issuance (or reservation for issuance, as
applicable), sale, and delivery of the Note and Warrant being sold hereunder and
the Common Stock to be issued upon the exercise of the Warrant has been taken or
will be taken prior to the Closing. This Agreement constitutes a valid and
legally binding obligation of the Company, enforceable in accordance with its
terms except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting enforcement of
creditors' rights generally, or as limited by laws relating to the availability
of specific performance, injunctive relief, or other equitable remedies.
(c) The authorized capital stock of the Company consists of (i)
30,000,000 shares of Common Stock, of which 17,696,367 shares (including shares
held in treasury) are issued and outstanding as of June 30, 1997; (ii) 2,415,946
shares of Class B Common Stock, of which no shares are issued and outstanding as
of the date hereof; (iii) 50,000 shares of preferred stock, of which 10,000 have
been designated Series A Preferred Stock and are issued and outstanding and
convertible at the election of the holder thereof into 1,218,487 shares of
Common Stock (subject to adjustment pursuant to certain anti-dilution
provisions); and (iv) 4,500 shares of preferred stock which have been designated
Series B Preferred Stock, all of which are issued and outstanding as of the date
hereof and which are not presently convertible into shares of Common Stock of
the Company (such conversion right being exercisable only after December 31,
1998). In addition, the Company has granted options to acquire up to 2,399,488
shares of Common Stock to certain former and current employees, consultants and
directors of the Company pursuant to stock option plans whereby the Company has
reserved for issuance up to 4,000,000 shares of Common Stock. Except as set
forth in this subsection (c) or otherwise provided in this Agreement, there are
no options,
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warrants or other rights to purchase any of the Company's authorized but
unissued capital stock.
(d) The Warrant Shares, when issued, sold and delivered in
accordance with the terms of this Agreement for the purchase price, will be duly
and validly issued, fully paid, non-assessable, not subject to any preemptive
rights, and free and clear of all liens, claims and encumbrances. Shares of
Common Stock have been duly and validly reserved for issuance upon exercise of
the Warrant into Common Stock. When issued upon the exercise of the Warrant or
upon the conversion of the Shares, the Warrant Shares will be duly and validly
issued, fully paid, non-assessable, not subject to any preemptive rights, and
free and clear of all liens, claims and encumbrances.
(e) To the best of the Company's knowledge, no consent, approval,
qualification, order or authorization of, or filing with, any local, state, or
federal governmental authority is required on the part of the Company in
connection with the Company's valid execution, delivery, or performance of this
Agreement, the offer, sale or issuance of the Securities, except for the consent
of RMS Limited Partnership to the incurrence of indebtedness by the Company
which consent shall be delivered at or prior to the Closing and except to the
extent that a pre-merger notification under the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust
Improvements Act of 1976, as amended, and the expiration of any applicable
waiting period without action having been taken to prevent the consummation of
the transactions contemplated may be required in connection with the exercise of
the Warrant and the delivery of the Warrant Shares.
(f) Subject in part to the truth and accuracy of the Company's
representations and warranties set forth in this Agreement, the offer, sale and
issuance of the Securities, as contemplated by this Agreement are exempt from
the registration requirements of the Securities Act of 1933, as amended
("Securities Act"). Neither the Company nor any authorized agent acting on its
behalf will take any action hereafter that would cause the loss of such
exemption.
(g) [Intentionally Omitted]
(h) The Company is not in violation or default of any provision of
its Certificate of Incorporation, Bylaws, or any mortgage, indenture, agreement,
instrument, or contract to which it is a party or by which it is bound or, to
the best of its knowledge, of any federal or state judgment, order, writ,
decree, statute, rule or regulation applicable to the Company, except to the
extent that the failure to do so would not have a material adverse effect on the
Company. The execution, delivery, and performance by the Company of this
Agreement and the consummation of the transactions contemplated hereby will not
result in any such violation or be in material conflict with or constitute, with
or without the passage of time or giving of notice, either a material default
under any such provision or an event that results in the creation of any
material lien, charge, or encumbrance upon any assets of the
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Company or the suspension, revocation, impairment, forfeiture, or non-renewal of
any material permit, license, authorization, or approval applicable to the
Company, its business or operations, or any of its assets or properties.
(i) No representation or warranty of the Company contained in this
Agreement or any other such document furnished to the Subscriber by or on behalf
of the Company, including without limitation, the SEC Filings contains an untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein, in light of the circumstances in which they
were made, not misleading. The SEC Filings conformed in all material respects as
of the date each was filed with the SEC to the disclosure requirements
applicable to such filing.
(j) The Company has filed the required federal, state and local tax
returns required of it and has paid all material taxes shown on such returns as
they become due. No claim has been assessed and is unpaid with respect to such
taxes.
(k) Except as described in the SEC filings, there is no action or
proceeding pending or, to the knowledge of the Company, currently threatened
against the Company in any court or before any arbitration panel or before or by
any federal, state or other governmental department or agency which may
substantially affect the validity of this Agreement or the right of the Company
to enter into it, or to consummate the transactions contemplated hereby, or
which might result, either individually or in the aggregate, in any material
adverse change in the assets, condition, affairs or prospects of the Company,
financially or otherwise, or any change in the current equity ownership of the
Company.
(l) The Company owns its property and assets free and clear of all
mortgages, liens, claims, and encumbrances other than liens arising by operation
of law which do not affect the Company's use of such property and assets. With
respect to the property and assets it leases, the Company is in compliance with
such leases and, to the best of its knowledge, holds a valid leasehold interest
free of any liens, claims, or encumbrances.
(m) Except as otherwise disclosed in the audited financial
statements at and for the year ended August 31, 1996, or the audited financial
statements at December 31, 1996, and for the four-month period then ended,
copies of which have been previously delivered by the Company to the Subscriber
(the "Financial Statements"), since December 31, 1996 there has not been (i) any
changes in the assets, liabilities, financial condition or operations of the
Company from that reflected in the Financial Statements except changes in the
ordinary course of business which have not been, either in any individual case
or in the aggregate, materially adverse; (ii) any material change, except in the
ordinary course of business, in the contingent obligations of the Company,
whether by way of guaranty, endorsement, indemnity, warranty or otherwise; (iii)
any damage, destruction or loss, whether or not covered by insurance, materially
and adversely affecting the properties or business of the Company; (iv) any
declaration or payment of a dividend or other distribution of the assets
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of the Company; or (v) to the best of the Company's knowledge, any other event
or condition of any character which materially and adversely affected the
Company's assets, liabilities, financial condition or operations.
(n) The foregoing representations, warranties and agreements shall
survive the execution of this Agreement.
ARTICLE IV
REGISTRATION RIGHTS
4.1 Registration
(a) The Company shall use its best efforts to effect the
registration under the Securities Act of the Warrant Shares prior to September
30, 1998 to the extent required to permit the disposition (in accordance with
the intended methods as specified in writing by the Subscriber at any time prior
to September 30, 1998) of the Warrant Shares; provided, however, that the
Company shall not be required to maintain the effectiveness of such registration
at any time when an exemption from registration is otherwise available to the
Subscriber affording the Subscriber the right to dispose of the Warrant Shares.
Any registration requested pursuant to this Section 4.1 shall be effected by the
filing of a registration statement on Form ▇-▇, ▇-▇ or S-3 (or any other form
that includes substantially the same information as would be required to be
included in a registration statement on such forms as presently constituted,
other than a registration statement relating to offers to employees pursuant to
plans or of securities to be issued in business combinations).
4.2 [Intentionally Omitted]
4.3 Precedence of Registration Rights.
The Subscriber and the Company agree that the registration rights contained
in this Article IV are in addition to any and all registration rights which
Subscriber is entitled to under any other agreement with the Company.
4.4 Registration Procedures.
(a) If, whenever and to the extent that the Company is required to
use its best efforts to register shares of Common Stock pursuant to this Article
IV, the Company shall as promptly as practicable:
(i) Prepare and file with the SEC a registration statement
with respect to such shares, and cause such registration statement to comply as
to form and content
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in all material respects with the SEC's forms, rules and regulations and use its
reasonable best efforts to cause such registration statement to become
effective;
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement until such
time as all of such shares have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in such
registration statement;
(iii) Furnish to the Subscriber such number of conformed copies
of such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits, except that the Company shall not be
obligated to furnish the Subscriber with more than three copies of such
exhibits), and such number of copies of the prospectus that is a part of such
registration statement (including each preliminary prospectus and any summary
prospectus), as the Subscriber may reasonably request in order to facilitate the
disposition of the Warrants Shares;
(iv) Use its best efforts to register or qualify the Warrant
Shares for sale under the securities or blue sky laws of such jurisdictions in
the United States as the Subscriber shall reasonably request in writing, and to
keep such registration or qualification in effect for so long as the period of
distribution contemplated thereby, and do any and all other acts and things
which may be necessary or advisable to enable the disposition in such
jurisdictions of the Warrant Shares, except that the Company shall not for any
such purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified, to subject
itself to taxation in any such jurisdiction, or to consent to general service of
process in any such jurisdiction;
(v) [Intentionally Omitted];
(vi) Notify the Subscriber, at any time when a prospectus
relating to a registration statement is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, 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 not
misleading in the light of the circumstances then existing, and at the request
of the Subscriber prepare and furnish to the Subscriber a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
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(vii) Use its best efforts to list the Warrant Shares so
registered on any securities exchange (including NASDAQ) on which the Common
Stock of the Company is then listed, if such shares are not already so listed
and if such listing is then permitted under the rules of such exchange; and
(viii) Make available for inspection by the Subscriber, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by such seller
or underwriter, all financial and other records, pertinent corporate documents
and properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any the Subscriber,
underwriter, attorney, accountant or agent in connection with such registration
statement.
(b) Required Actions by the Subscriber. In connection with the
registration of Warrant Shares pursuant to this Article IV, the Subscriber
hereby agrees as follows:
(i) the Subscriber shall cooperate with the Company and any
underwriters to facilitate the timely preparation and filing of the registration
statement, and for so long as the Company is obligated to file and keep
effective the registration statement, shall provide to the Company, in writing,
for use in the registration statement, all such information regarding the
Subscriber and their plan of distribution of the Warrant Shares as may be
necessary to enable the Company to prepare the registration statement and
prospectus covering such Warrant Shares, to maintain the currency and
effectiveness thereof and otherwise to comply with all applicable requirements
of law in connection therewith;
(ii) the Subscriber shall timely complete and execute all
questionnaires, powers of attorney, indemnities, hold-back agreements,
underwriting agreements and other documents required under the terms of any
underwriting arrangements or by the SEC or by any state securities regulatory
body;
(iii) during such time as the Subscriber may be engaged in a
distribution of Warrant Shares registered pursuant to this Article IV, the
Subscriber shall comply with Regulation M promulgated under the Exchange Act
(the "Rules"), to the extent applicable, and pursuant thereto it shall, among
other things: (w) not engage in any stabilization activity in connection with
the securities in contravention of the Rules; (x) distribute the shares solely
in the manner described in the registration statement; (y) cause to be furnished
to each broker through whom the shares may be offered, if any, or to the offeree
if an offer is not made through a broker, such copies of the prospectus and any
amendment or supplement thereto and documents incorporated by reference therein
as may be required by law; and (z) not bid for or purchase any securities of the
Company or attempt to induce any person to purchase any securities of the
Company other than as permitted under the Exchange Act;
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(iv) upon receipt of a notice from the Company, promptly
discontinue any distribution of shares until notified by the Company that the
distribution of shares may re-commence;
(v) upon written notice from the Company that the Company
intends to proceed with a distribution of any of its shares and that in
connection therewith it requires the suspension by the Subscriber of the
distribution of its shares, to cease distributing such shares until such time as
the distribution by the Company has been completed; and
(vi) at least five (5) days prior to any distribution of
registered shares other than in an underwritten offering, the Subscriber will
(y) advise the Company in writing of the dates on which the distribution will
commence and terminate, the number of the shares to be sold and the terms and
the manner of sale; and (z) inform the Company and any broker/dealers through
whom sales of the shares may be made when each distribution of such shares is
completed.
(c) Registration Expenses. The registration expenses incurred in
connection with any registration pursuant to this Article IV shall be paid in
full by the Company except that the Subscriber shall pay its own legal expenses
and all underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of any Warrant Shares owned by the
Subscriber and sold pursuant to a registration statement effected pursuant to
this Article IV.
(d) Postponement. The Company shall be entitled to postpone the
filing of a registration statement otherwise required to be prepared and filed
by it pursuant to Section 4.1, for a reasonable period of time not to exceed (x)
with respect to clause (i) of this sentence, the date which is five (5) days
after the filing with the SEC of the Company's next regularly required quarterly
or annual report and (y) with respect to clauses (ii) and (iii) of this
sentence, 60 days, if, at the time it receives a registration request from
Subscriber, (i) such registration would require the public disclosure of
material non-public information concerning any transaction or negotiations
involving the Company or any affiliate (as defined in Rule 12b-2 under the
Exchange Act) that, in the opinion of counsel to the Company, is not yet
required to be publicly disclosed and the Board of Directors of the Company, in
good faith, determines that such disclosure would materially interfere with such
transaction or negotiations, (ii) such registration would interfere, in the good
faith judgment of the Board of Directors, with bona fide financing plans of the
Company or would otherwise require premature disclosure of information which
would adversely affect or otherwise be detrimental to the Company, or (iii) the
Company proposes to file a registration statement under the Securities Act for
the offering and sale of securities for its own account in an underwritten
offering and the managing underwriter therefor shall advise the Company in
writing that in its opinion the filing or effectuation of a registration
requested pursuant to Section 4.1 herein would materially adversely affect the
success of the offering of the securities proposed to be registered for the
account of the Company.
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(e) Holdback Agreements. If any registration of Shares pursuant to
this Article IV shall be in connection with an underwritten public offering, the
Subscriber agrees not to effect any public sale or distribution, including any
sale under Rule 144 of any shares of Common Stock or any other security
convertible into or exchangeable or exercisable for any shares of Common Stock
(in each case, other than as part of such underwritten public offering) during
the ten (10) days prior to, and during the 90-day period (or such longer period
as any underwriter may reasonably request) beginning on, the effective date of
the related registration statement. The Company may impose stop-transfer
instructions with respect to the shares subject to the foregoing restrictions
during such period.
(f) Term. The indemnification obligations contained in subsections
(g) and (h) shall survive for the period of the statute of limitations with
respect thereto.
(g) Indemnification. Each of the Subscriber and the Company agree to
indemnify the other in connection with any registration effected pursuant to
this Article IV as follows:
(i) To the extent permitted by law, the Company will indemnify
the Subscriber, its officers, directors, employees, subcontractors, consultants,
agents, legal counsel, and accountants and each underwriter, broker or dealer,
if any, of the Company's securities covered by such a registration statement,
and each person who controls the Subscriber or such underwriter, broker or
dealer within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages, and liabilities (or actions, proceedings, or
settlements in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any prospectus,
offering circular, or other document (including any related registration
statement, notification, or the like) incident to any such registration,
qualification, or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by the Company of the
Securities Act, the Exchange Act or any rule or regulation thereunder applicable
to the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification, or compliance, and will
reimburse the Subscriber and its officers, directors, employees, subcontractors,
consultants, agents, legal counsel, and accountants, each such underwriter,
broker or dealer, and each person who controls the Subscriber or such
underwriter, for any legal and other expenses reasonably incurred in connection
with investigating and defending or settling any such claim, loss, damage,
liability, or action, provided that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability, or expense
arises out of or is based on any untrue statement or omission based upon written
information furnished to the Company by or on behalf of the Subscriber or such
underwriter, broker or dealer and stated to be specifically for use therein or
any failure by the Subscriber or such underwriter, broker or dealer to deliver a
final prospectus or supplement or amendment correcting earlier documents. It is
agreed that the indemnity agreement contained in this Article IV shall not apply
to amounts paid in settlement
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of any such loss, claim, damage, liability, or action if such settlement is
effected without the consent of the Company.
(ii) To the extent permitted by law, the Subscriber will
indemnify the Company, each of its officers, directors, partners, employees,
subcontractors, consultants, agents, legal counsel, and accountants and each
underwriter, if any, of the Company's securities covered by such a registration
statement, and each person who controls the Company or such underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages, and liabilities (or actions, proceedings, or settlements in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, each of its officers, directors, partners, employees,
subcontractors, consultants, agents, legal counsel, and accountants, each such
underwriter, and each such control person, for any legal and other expenses
reasonably incurred in connection with investigating and defending or settling
any such claim, loss, damage, liability, or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Subscriber; provided, however, that the Subscriber will be liable hereunder
in any such case if and only to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in strict
conformity with information pertaining to the Subscriber, as such, furnished in
writing to the Company by the Subscriber stated to be specifically for use in
such registration statement and prospectus; provided, further, however, that the
liability of the Subscriber hereunder shall be limited to the proportion that
the public offering price of the Warrant Shares sold by the Subscriber under
such registration statement bears to the total public offering price of all
securities sold thereunder, but not in any event to exceed the proceeds received
by the Subscriber from the sale of the Warrant Shares covered by such
registration statement; and provided, further, however, that the obligations of
the Subscriber hereunder shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Subscriber.
(iii) If the indemnification provided for in Section 4.5(g) is
held by a court of competent jurisdiction to be unavailable to the party seeking
such indemnification (the "Indemnified Party") with respect to any loss,
liability, claim, damage, or expense referred to therein, then the party which
is required to provide indemnification pursuant to Section 4.5(g) (the
"Indemnifying Party") in lieu of indemnifying such Indemnified Party hereunder,
shall contribute to the amount paid or payable by such Indemnified Party as a
result of such loss, liability, claim, damage, or expense in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and of the Indemnified Party on the other in connection with the
statements or omissions that resulted in such loss,
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liability, claim, damage, or expense as well as any other relevant equitable
considerations, provided, however, that in any such case, (x) no such
Indemnifying Party will be required to contribute any amount in excess of the
public offering price of all shares offered by it pursuant to such registration
statement; and (y) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(iv) Notwithstanding the foregoing or Section 4.5(h) below, to
the extent that the provisions on indemnification contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(h) Indemnification Procedures. Each party entitled to
indemnification under Section 4.5(g) of this Agreement (the "Indemnified Party")
shall give notice to the party required to provide indemnification (the
"Indemnifying Party") promptly after such Indemnified Party has actual knowledge
of any claim as to which indemnity may be sought, and (if the claim is made by a
third party) shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not unreasonably be withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its indemnification obligations to
the extent such failure is not prejudicial. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of the
Indemnified Party, consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
(i) Delay of Registration. the Subscriber shall have no right to
take an action to restrain, enjoin or otherwise delay any registration as a
result of any controversy that might arise with respect to the interpretation or
implementation of this Article IV.
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ARTICLE V
MISCELLANEOUS
5.1 Indemnity. Without prejudicing any other remedy available to the
parties at law or in equity and except as set forth in Article IV hereof, the
parties hereby covenant, immediately upon demand therefor, to indemnify, defend,
and hold each other (and their respective subsidiary, affiliated, or parent
entities, officers, directors, stockholders, attorneys, employees, agents, and
representatives) harmless from and against any and all costs, losses, damages,
penalties, fines, or expenses (including without limitation reasonable
attorneys' fees, court costs, and associated expenses) suffered, imposed upon,
or incurred by them in any manner arising out of, relating to, or in connection
with the following:
(a) any representation or warranty of either of the parties set
forth herein being untrue or incorrect in any material respect or the failure of
either of the parties to materially observe or timely and fully perform any of
their respective obligations hereunder;
(b) any material misrepresentation in or material omission from any
information provided by the parties to each other in connection with this
Agreement or the consummation of the transactions contemplated herein; and
(c) any expenses, claims, costs, or other liabilities or obligations
of any description whatsoever arising from or in any way connected with any
claim that may be brought against either party by a stockholder of that party.
5.2 Modification. Neither this Agreement nor any provisions hereof shall
be modified, discharged or terminated except by an instrument in writing signed
by the party against whom any waiver, change, discharge or termination is
sought.
5.3 Notices.
(a) Any notice, demand or other communication which any party hereto
may be required, or may elect, to give to anyone interested hereunder shall be
sufficiently given if (i) deposited, postage prepaid, in a United States mail
letter box, registered or certified mail, return receipt requested, addressed to
such address as may be given herein, or (ii) delivered personally at such
address.
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(b) Addresses:
If to the Company to:
Precision Systems, Inc.
▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇
▇▇. ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: President
If to Subscriber to the address set forth on the signature page
hereof.
5.4 Counterparts. This Agreement may be executed through the use of
separate signature pages or in any number of counterparts, and each of such
counterparts shall, for all purposes, constitute one agreement binding on all
parties, notwithstanding that all parties are not signatories to the same
counterpart.
5.5 Binding Effect. Except as otherwise provided herein, this Agreement
shall be binding upon and inure to the benefit of the parties and their heirs,
executors, administrators, successors, legal representatives and assigns. If the
Subscriber is more than one person, the obligation of the Subscriber shall be
joint and several and the agreements, representations, warranties and
acknowledgments herein contained shall be deemed to be made by and be binding
upon each such person and its heirs, executors, administrators and successors
5.6 Entire Agreement. This instrument contains the entire agreement of the
parties and there are no representations, covenants or other agreements except
as stated or referred to herein.
5.7 Assignability. This Agreement is not transferable or assignable by the
Subscriber.
5.8 Governing Law; Jurisdiction and Choice of Forum. Notwithstanding the
place where this Agreement may be executed by any of the parties hereto, the
parties expressly agree that all the terms and provisions hereof shall be
construed in accordance with and governed by the laws of the State of Delaware.
5.9 Pronouns. The use herein of the masculine pronouns "him" or "his" or
similar terms shall be deemed to include the feminine and neuter genders as well
and the use herein of the singular pronoun shall be deemed to include the plural
as well.
5.10 Severability. The holding of any provision of this Agreement to be
invalid or unenforceable by a court of competent jurisdiction shall not affect
any other provision of this Agreement, which shall remain in full force and
effect.
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5.11 Waiver. It is agreed that a waiver by either party of a breach of any
provision of this Agreement shall not operate, or be construed, as a waiver of
any subsequent breach by that same party
5.12 Further Assurances. The parties agree to execute and deliver all such
further documents agreements and instruments and take such other and further
action as may be necessary or appropriate to carry out the purposes and intent
of this Agreement.
IN WITNESS WHEREOF, the Company and the Subscriber have executed this
Agreement as of the date first written above.
RMS LIMITED PARTNERSHIP, PRECISION SYSTEMS, INC.,
a Nevada limited partnership a Delaware Corporation
----------------------- -----------------------
By: By:
------------------- -------------------
Its: Its:
------------------- -------------------
Address:
▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇
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23
Exhibit A
Form of Note
[Attached]
24
Exhibit B
Warrant Certificate
[Attached]
25
Exhibit B-1
Loan Agreement
[Attached]
22
26
Exhibit C
SEC Filings
The Company's Report on Form 10-K for the transition period ended December
31, 1996.
The Company's Report on Form 10-K for the fiscal year ended August 31,
1996.
The Company's Quarterly Report on Form 10-Q for the quarters ended March 31
and June 30, 1997.
The description of the Common Stock of the Company which is contained in
the Company's Registration Statement on Form 10 dated April 27, 1992,
amended by Form 8 on June 22, 1994, and July 24, 1994 and August 3, 1994.
27
Exhibit D
RISK FACTORS
DEPENDENCE ON CERTAIN CUSTOMERS
Sales to MCI Telecommunications, Inc. accounted for approximately 45% and
6%, respectively of the Company's revenues for the year ended August 31, 1996
and the four months ended December 31, 1996. The loss of this customer could
have a material adverse effect on the Company's operations and financial
condition.
COMPETITION
The worldwide telecommunications industry is highly competitive. The
Company believes that the features and functionalities of its products coupled
with its distribution capability, system reliability, service, support, and
pricing, position the Company to compete in the telecommunications industry
worldwide. In addition, the Company is committed to ongoing research and
development (R&D) efforts and is dedicated to developing new products and
strengthening existing products. The Company views its extensive R&D efforts as
essential to maintaining a competitive position in the industry.
One of the most important competitive advantages for the Company is its
multi-application platform. It is the Company's view that the majority of
service providers purchasing enhanced services now consider it a necessity to
have the ability to run multiple applications on a single platform. If a service
provider introduces an enhanced service that does not deliver the expected
subscriber acceptance, it has the capability to add-on or replace the service
with a different application which can run on the same installed platform. A
multi-application platform diffuses the risk associated with the investment
required to run enhanced services. In addition, the Company's multi-application
platform enables a layered, open architecture design to support the most widely
used hardware solutions (including media servers, switches, voice response
units, and network standards).
In the United States, the manufacturing prohibition that precluded the
Regional ▇▇▇▇ Operating Companies ("RBOCs") from manufacturing hardware and
software that provide voice processing services has been lifted. This allows the
RBOCs to compete against the Company for these products. It is the Company's
view that the RBOCs will focus their priorities on protecting their existing
customers and markets, moving into their competitors' markets, and introducing
new services. The Company believes that in order to introduce new services
competitively, the RBOCs will contract with companies, such as Precision
Systems, so as to eliminate the large capital investment, expertise, and time
necessary to develop these products. However, the Company could potentially be
competing with the RBOCs for provision of these types of services.
Internationally, it is the Company's view that the deregulation underway or
proposed in many countries will continue to increase the opportunities for
expansion of markets for the
28
Company's products. The acquisition of Vicorp was a major factor in establishing
an international presence for the Company as Vicorp is a European-based company
that has an existing customer base and strong partner relationships. See
"International Operations."
The Company expects to continue to face substantial competition from
existing and new competitors including other companies with considerably greater
financial, technical, marketing and sales resources. The Company also
anticipates that a number of its competitors will be introducing new or enhanced
products during the next several years. Accordingly, other companies may succeed
in developing products earlier than the Company or developing products that are
more effective or less costly than those developed and introduced by the
Company.
VOLATILITY OF STOCK PRICE
Based on its trading history, the Company believes that the market for the
Company's Common Stock is highly volatile. Factors such as quarterly
fluctuations in operating results, announcements by the Company or its
competitors or technological innovations or product improvements, as well as
changes in general economic conditions and other factors, potentially affect the
market price of the Common Stock. The Company's three largest shareholders
("Large Shareholders"), Alta Investissements SA (2,808,427 shares of Common
Stock), Vulcan Ventures Incorporated (2,750,000 shares of Common Stock) and RMS
Limited Partnership (2,415,945 shares of Common Stock and 10,000 shares of
Series A Preferred Stock which are convertible into 1,218,487 shares of Common
Stock) own large blocks of the Company's Common Stock. RMS Limited Partnership
has exercised its "piggyback" registration rights with respect to 2,415,495
shares of Common Stock. The Company has caused the resale of those shares of
Common Stock to be registered under the Securities Act, which registration could
cause a large number of shares of Common Stock to be sold in the public market.
The Company is unable to predict the effect that sales by the Large Stockholders
may have on the then prevailing price of the Common Stock. However, such sales
may have an adverse effect on the market price for the Common Stock and could
impair the Company's ability to raise capital through an offering of its
securities. See "Shares Eligible for Future Sale."
KEY PERSONNEL AND MANAGEMENT OF GROWTH
The Company's success will depend upon the continued contributions of its
officers and key personnel, the loss of any of whom could materially adversely
affect the Company's operations. The Company's growth will depend upon its
ability to attract and retain skilled employees, particularly in sales and
research and development, and the ability of its officers and key employees to
successfully manage growth, to implement appropriate management information
systems and controls to assure timely delivery of the Company's products, and to
continue to refine its products and to develop new products which incorporate
advancements in technology. Any failure to do so could have a material adverse
effect on the Company's operations.
29
BUSINESS-RELATED RISKS
The information set forth under the captions "Markets", "Competition" and
"Customers" in Part I of the Company's Annual Report on Form 10-K for the
transition period ended December 31, 1996, in addition to the other information
included therein, is hereby incorporated by reference herein.
INTERNATIONAL OPERATIONS
A significant portion of the Company's business is derived from
international markets, including major operations throughout Europe. Such
operations may be subject to various risks including governmental activities
that may limit or disrupt markets, restrict the movement of funds or result in
the deprivation of contract rights or the taking of property without fair
compensation. In certain countries, such operations may be subject to the
additional risk of fluctuating currency values and exchange controls. In the
international markets in which the Company operates, it is subject to various
laws and regulations with respect to the operation and taxation of its business,
the imposition, application and interpretation of which can prove to be
uncertain.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock. It is
currently contemplated that the Company will not pay cash dividends on its
Common Stock in the immediately foreseeable future. The payment and level of
cash dividends by the Company on its Common Stock are subject to the discretion
of the Board of Directors of the Company. Decisions regarding the payment of
dividends will be based upon a number of factors, including the operating
results and financial requirements of the Company. The Company's dividend policy
will be reviewed by the Board of Directors of the Company at such future times
as may be appropriate in light of relevant factors existing at such times.
TECHNOLOGICAL CHANGES
The market for the Company's products is subject to rapid technological
change, requiring a high level of expenditures by the Company for research and
development. Current competitors or new market entrants may introduce and
deliver new products or features that could adversely affect the competitive
position of the Company's systems in some or all of its markets. In order to
maintain its competitive position, the Company must continue to enhance its
existing products and to develop and market new products successfully, and there
is no assurance that the Company will be able to do so.
The Company releases performance enhancements and new features for its
products on an ongoing basis. Because of the increasing complexity of the
Company's products, these efforts have continued to increase in technical
difficulty. Products as complex as the Company's often contain undetected errors
or "bugs" when first released, which are discovered only after the product has
been used by different customers and in varying applications. Because of the
importance the Company places on product reliability, the
30
Company has, from time to time, temporarily delayed product shipments to
complete "debugging" efforts. Moreover, rapid technology changes in the voice
and data communications industry may render the Company's technology obsolete at
any time, requiring the Company to react quickly to develop more sophisticated
and competitive technology and thereby increasing the possibility of design
errors. Identifying and correcting errors and making required design
modifications typically is costly, can be time consuming and be expected to
become more difficult as the Company's products increase in complexity. Despite
extensive testing, there can be no assurance that errors will not be discovered
in the future, causing delays in product introductions and shipments or
requiring design modifications which could adversely affect operating results.
LIMITED SOURCES OF SUPPLY
Although the Company generally uses standard parts and components in
assembling its products, certain of the processing boards used in the Enhanced
Services Platform ("ESP") platform are currently manufactured to the Company's
specifications by a single supplier. The Company is currently exploring the
availability of additional manufacturing capacity for these processing boards.
To date, the Company has been able to obtain adequate supplies of these
components in a timely manner from existing sources. However, delay or lack of
supply from existing sources or the inability to develop alternative sources if
and as required in the future could adversely affect the Company's operating
results.
MARKETING UNCERTAINTIES
The Company plans to expand its current efforts to market its product by
increasing the number of its direct sales personnel and by entering into
additional joint marketing arrangements with computer and telephone switch
manufacturers. The Company expects that, for 1997, it will substantially
increase its marketing efforts in the Asia/Pacific region in order to increase
its revenue opportunities. In the course of expanding its marketing efforts, the
Company may encounter many of the difficulties typically associated with such an
expansion, including problems in identifying and retaining qualified sales
personnel. While the Company believes that an expanded marketing effort will
contribute to an increase in sales, there can be no assurance that this increase
will occur or that any increase will be sufficient to offset increased costs of
marketing.
FUTURE OPERATING RESULTS, CASH FLOW AND QUARTERLY FLUCTUATIONS
Based on the fact that the Company acquired Vicorp N.V. and subsidiaries in
April, 1996 and BFD Productions in October, 1996 (both acquisitions accounted
for using the purchase method) and that the Company participates in a rapidly
changing technological market, the Company can give no assurance as to its
ability to generate revenue growth, profitability or positive cash flow on a
quarterly or annual basis. The Company's operating expenses are increasing as
the Company expands its operations, and operating results for 1997 will
potentially be adversely affected if revenues do not increase correspondingly.
Management is actively involved in discussions with several potential sources of
capital investment. The Company expects that with the recent acquisitions of
Vicorp N.V. and BFD
31
Productions, Inc., its working capital requirements will increase significantly
over prior periods. The Company will be able to fund its operating and investing
activities through 1997 through the use of its current working capital,
including the collection of existing accounts receivables and the generation of
future revenue. In the event that such sources prove to be insufficient, the
Company may be required to seek additional debt or equity financing. However,
there is no assurance that any such efforts will result on additional capital
sources for the Company.
BUSINESS EXPANSION
The Company expects to engage in significant research and development and
to undertake marketing efforts in order to introduce new products and services.
There can be no assurances that such products and services can be developed or
marketed or that the sales of such products and services will be profitable to
the Company. In addition, the Company may attempt to acquire complementary
businesses which manufacture products or provide services in the industry. There
can be no assurances that acquisition candidates can be found, that acquisitions
can be consummated on favorable terms or that such acquisitions, if completed,
will be successful. Additionally, given the Company's acquisition of Vicorp N.V.
and its large presence in international markets, regulatory, monetary, and
inflationary factors can potentially negatively impact the Company's operations
in the future.
SHARES ELIGIBLE FOR FUTURE SALE
Subject to certain limitations, Vulcan Ventures Incorporated ("Vulcan") is
entitled to request the registration of the greater of 750,000 shares of Common
Stock or 10% of the number of outstanding shares of Common Stock and to
"piggyback" on registrations effected by the Company. Vulcan owns 2,750,000
shares of Common Stock. Additionally, Alta Investissements SA has certain demand
and "piggyback" registration rights with respect to its 2,808,427 shares of
Common Stock. By exercising their registration rights, subject to certain
conditions, such holders could cause a large number of shares of Common Stock to
be sold in the public market. The Company is unable to predict the effect that
sales by such holders may have on the then prevailing price of the Common Stock.
However, such sales may have an adverse effect on the market price for the
Common Stock. See "Volatility of Stock Price."
LITIGATION
The Company is subject to certain legal proceedings in the ordinary course
of business (see Item 3 - "Legal Proceedings" of the Company's December 31, 1996
Form 10-K). After taking into consideration legal counsel's evaluation of such
actions, management is of the opinion that their final resolution will not have
a significant adverse effect upon the Company's business or its consolidated
financial statements, although there can be no assurance given of the ultimate
outcome of any of such litigation.
The Company operates in an industry with increased risk of litigation
resulting from aggressive prosecution of intellectual property claims. This
litigation uncertainty could
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potentially postpone, delay or eliminate potential sales opportunities and,
therefore, affect the Company's operations.
PRODUCT PROTECTION
The Company relies on a combination of trade secrets and copyright laws,
patents, licenses, non-disclosure agreements, and technical measures to protect
its rights in its products. However, there can be no assurance that these
measures will fully protect the Company from the wrongful disclosure or
misappropriation of its proprietary information.
PATENTS AND LICENSES
The Company has obtained a patent for certain elements of the ESP platform.
There can be no assurance, however, that the Company's intellectual property
protection will be sufficient to prevent competitors from developing similar
technology. The Company currently licenses certain technology from third parties
and plans to do so in the future. Although the Company is not aware of any
infringement by its products or patent on any patent owned by any third party,
if such infringement were to exist, it could have a material adverse effect on
the Company. The Company believes that any additional licenses or other rights
to products or features under patents or copyrights of others could be obtained
under conditions that would not have a material adverse effect on the Company;
however, there can be no assurance of this.
FIXED PRICE CONTRACTS
The Company negotiates certain of its customer contracts under fixed-price
terms. The Company expends significant effort to analyze the requirements of
such opportunity in order to minimize any potential cost over-runs above the
contract value. However, there an be no assurance that such measures will fully
protect the Company against material losses on these fixed-price contracts.