As filed with the Securities and Exchange Commission on December 19, 2003
Registration No. 333-__________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________________
SSP SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0757190
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17861 CARTWRIGHT ROAD
IRVINE, CALIFORNIA 92614
(949) 851-1085
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_________________________
MARVIN J. WINKLER,
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
SSP SOLUTIONS, INC.
17861 CARTWRIGHT ROAD
IRVINE, CALIFORNIA 92614
(949) 851-1085
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPY TO:
GREGG AMBER, ESQ.
CRISTY LOMENZO PARKER, ESQ.
RUTAN & TUCKER, LLP
611 ANTON BOULEVARD, SUITE 1400
COSTA MESA, CALIFORNIA 92626
(714) 641-5100
Approximate date of commencement of proposed sale to public: FROM TIME TO
TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: | |
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please 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
under the Securities Act, please check the following box: | |
CALCULATION OF REGISTRATION FEE
======================================= ================ ==================== ==================== =================
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE REGISTERED OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED (1) PER SHARE OFFERING PRICE FEE
--------------------------------------- ---------------- -------------------- -------------------- -----------------
Common stock, $0.01 par value 45,641,471 $1.21 (2) $55,226,180.31 (2) $4,467.80 (2)
======================================= ================ ==================== ==================== =================
(1) This registration statement covers an aggregate of 42,184,388 shares,
including 2,386,819 shares issued and outstanding and 39,797,569 shares
underlying warrants, convertible promissory notes and convertible preferred
stock. In the event of a stock split, stock dividend, or similar
transaction involving common stock of the registrant, in order to prevent
dilution, the number of shares registered shall be automatically increased
to cover the additional shares in accordance with Rule 416(a) under the
Securities Act.
(2) The proposed maximum offering price per share has been estimated solely for
the purpose of calculating the registration fee pursuant to Rule 457(c) of
the Securities Act based on the average of the high and low sales prices
per share as reported on The Nasdaq National Market on December 17, 2003.
Pursuant to Rule 429, this registration statement contains a combined prospectus
that covers the following numbers of shares of common stock registered on the
Registrant's registration statement numbers shown below, in addition to the
shares being registered on this registration statement:
Registration statement no. 333-90574 - 3,656,136 shares, including 989,253
outstanding shares of common stock and 2,666,883 shares of common stock
underlying warrants, options and convertible promissory notes; and
Registration statement no. 333-101959 - 1,852,500 outstanding shares of
common stock.
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 becomes effective on
such date as the Commission, acting under Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THE SELLING SECURITY HOLDERS IDENTIFIED IN THIS PROSPECTUS MAY NOT SELL
SECURITIES UNDER THIS PROSPECTUS UNTIL THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART BECOMES EFFECTIVE.
SUBJECT TO COMPLETION, DATED DECEMBER 18, 2003
PROSPECTUS
SSP SOLUTIONS, INC.
51,150,107 SHARES OF COMMON STOCK
An aggregate of 5,228,572 issued and outstanding shares of our common
stock and an aggregate of 45,921,535 shares of our common stock underlying
warrants, convertible promissory notes, options and convertible preferred stock
are being offered for resale under this prospectus by some of our security
holders identified in this prospectus for their own accounts.
Our common stock currently trades on The Nasdaq National Market under
the symbol "SSPX." The last reported sale price of our common stock on December
16, 2003 was $1.25 per share.
Our principal offices are located at 17861 Cartwright Road, Irvine,
California 92614, and our telephone number is (949) 851-1085.
_________________________
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 3.
_________________________
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THOSE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THOSE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
The date of this prospectus is _______________, 2004.
TABLE OF CONTENTS
Page
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RISK FACTORS...................................................................3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................16
SELLING SECURITY HOLDERS......................................................17
PLAN OF DISTRIBUTION..........................................................47
USE OF PROCEEDS...............................................................49
INDEMNIFICATION OF DIRECTORS AND OFFICERS.....................................49
EXPERTS.......................................................................50
LEGAL MATTERS.................................................................50
TRANSFER AGENT AND REGISTRAR..................................................50
WHERE YOU CAN FIND MORE INFORMATION...........................................51
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............................51
RISK FACTORS
AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO INVEST OR MAINTAIN AN INVESTMENT IN SHARES OF OUR
COMMON STOCK. THIS PROSPECTUS CONTAINS OR INCORPORATES BY REFERENCE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE
FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES THAT MAY ADVERSELY
IMPACT OUR BUSINESS AND OUR STOCKHOLDERS BY, AMONG OTHER THINGS, MAKING IT
DIFFICULT FOR US TO RAISE ADDITIONAL DEBT OR EQUITY FINANCING TO THE EXTENT
NEEDED FOR OUR CONTINUED OPERATIONS OR FOR PLANNED EXPANSION.
We may not become profitable or significantly increase our revenue. We
incurred net losses of $8.6 million for the year ended December 31, 2002 and
$5.1 million for the nine months ended September 30, 2003. To achieve
profitability, we will need to generate and sustain sufficient revenues while
maintaining reasonable cost and expense levels. We expect to continue to incur
significant operating expenses primarily to support research and development and
expansion of our sales and marketing efforts. These expenditures may not result
in increased revenues or customer growth. We do not know when or if we will
become profitable. We may not be able to sustain or increase profitability on a
quarterly or annual basis.
Our losses from operations, our use of cash in operating activities,
and our accumulated deficit and working capital deficiency at December 31, 2002
and 2001, among other factors, raised substantial doubt about our ability to
continue as a going concern and led our independent auditors to include in their
opinions contained in our consolidated financial statements as of December 31,
2002 and 2001 and for each of the years in the three-year period ended December
31, 2002 an explanatory paragraph related to our ability to continue as a going
concern. Analysts and investors generally view reports of independent auditors
questioning a company's ability to continue as a going concern unfavorably.
Future losses may adversely affect our business, prospects, financial condition,
results of operations and cash flows. We urge potential investors to review the
reports of our independent auditors and our consolidated financial statements
before making a decision to invest in our company.
WE HAVE NOT GENERATED ANY SIGNIFICANT SALES OF OUR PRODUCTS WITHIN THE
COMPETITIVE COMMERCIAL MARKET NOR HAVE WE ESTABLISHED A SUFFICIENT SALES
AND MARKETING FORCE TO PROMOTE OUR PRODUCTS TO POTENTIAL COMMERCIAL
CUSTOMERS, WHICH MAKES IT DIFFICULT TO EVALUATE OUR CURRENT BUSINESS
PERFORMANCE AND FUTURE PROSPECTS.
Although we have had some success in selling our security solutions to
government agencies, we are just beginning to enter the complex and competitive
commercial market for digital commerce and communications security solutions.
Many potential customers in our target markets are now becoming aware of the
need for security products and services in the digital economy to conduct their
business. Historically, only enterprises that had substantial resources
developed or purchased security solutions for delivery of digital content over
the Internet or through other means. Also, there is a perception that security
in delivering digital content is costly and difficult to implement. Therefore,
we will not succeed unless we can educate our target markets about the need for
security in delivering digital content and convince potential customers of our
ability to provide this security in a cost-effective and easy-to-use manner.
3
Even if we convince our target markets about the importance of and need
for such security, we do not know if this will result in the sale of our
products. We may be unable to establish sales and marketing operations at levels
necessary for us to grow this portion of our business, especially if we are
unsuccessful at selling this product into vertical markets. We may not be able
to support the promotional programs required by selling simultaneously into
several markets. If we are unable to develop an efficient sales system, or if
our products or components do not achieve wide market acceptance, then our
operating results will suffer and our earnings per share will be adversely
affected.
WE FACE INTENSE COMPETITION AND PRICING PRESSURES FROM A NUMBER OF SOURCES,
WHICH MAY REDUCE OUR AVERAGE SELLING PRICES AND GROSS MARGINS.
The markets for our products and services are intensely competitive. As
a result, we face significant competition from a number of sources. We may be
unable to compete successfully because many of our competitors are more
established, benefit from greater name recognition and have substantially
greater financial, technical and marketing resources than we have. In addition,
there are several smaller and start-up companies with which we compete from time
to time. We expect competition to increase as a result of consolidation in the
information security technology industry.
The average selling prices for our products may decline as a result of
competitive pricing pressures, promotional programs and customers who negotiate
price reductions in exchange for longer-term purchase commitments. The pricing
of products depends on the specific features and functions of the products,
purchase volumes and the level of sales and service support required. We expect
competition to increase in the future. As we experience pricing pressure, we
anticipate that the average selling prices and gross margins for our products
will decrease over product lifecycles. These same competitive pressures may
require us to write down the carrying value of any inventory on hand, which
would adversely impact our operating results and adversely affect our earnings
per share.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL NUMBER OF
CUSTOMERS, AND THE LOSS OF ONLY ONE OF THOSE CUSTOMERS COULD ADVERSELY
IMPACT OUR OPERATING RESULTS.
We depend on a limited number of customers for a substantial portion of
our revenue. During the year ended December 31, 2002, and the three and nine
months ended September 30, 2003, we derived 28%, 25% and 30%, respectively, of
our consolidated net revenue for those periods from a single customer. Many of
our contracts with our significant customers are short-term. The non-renewal of
any significant contract upon expiration, or a substantial reduction in sales to
any of our significant customers, would adversely affect our business unless we
were able to replace the revenue we received from those customers.
OUR RELIANCE ON THIRD PARTY TECHNOLOGIES FOR SOME SPECIFIC TECHNOLOGY
ELEMENTS OF OUR PRODUCTS AND OUR RELIANCE ON THIRD PARTIES FOR
MANUFACTURING MAY DELAY PRODUCT LAUNCH, IMPAIR OUR ABILITY TO DEVELOP AND
DELIVER PRODUCTS OR HURT OUR ABILITY TO COMPETE IN THE MARKET.
Our ability to license new technologies from third parties is and will
continue to be critical to our ability to offer a complete suite of products
that meets customer needs and technological requirements. Some of our licenses
do not run for the full duration of the third party's patent for the licensed
technology. We may not be able to renew our existing licenses on favorable
terms, or at all. If we lose the rights to a patented technology, we may need to
stop selling or may need to redesign our products that incorporate that
technology, and we may lose a competitive advantage. In addition, competitors
could obtain licenses for technologies for which we are unable to obtain
licenses, and third parties may develop or enable others to develop a similar
solution to digital communication security issues, either of which events could
erode our market share. Also, dependence on the patent protection of third
parties may not afford us any control over the protection of the technologies
upon which we rely. If the patent protection of any of these third parties were
compromised, our ability to compete in the market also would be impaired.
4
THIRD PARTIES COULD OBTAIN ACCESS TO OUR PROPRIETARY INFORMATION OR COULD
INDEPENDENTLY DEVELOP SIMILAR TECHNOLOGIES BECAUSE OF THE LIMITED
PROTECTION FOR OUR INTELLECTUAL PROPERTY.
Despite the precautions we take, third parties may copy or obtain and
use our proprietary technologies, ideas, know-how and other proprietary
information without authorization or may independently develop technologies
similar or superior to our technologies. In addition, the confidentiality and
non-competition agreements between us and our employees, distributors and
clients may not provide meaningful protection of our proprietary technologies or
other intellectual property in the event of unauthorized use or disclosure.
Policing unauthorized use of our technologies and other intellectual property is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. Furthermore, the laws of other jurisdictions may afford little
or no effective protection of our intellectual property rights. Our business,
financial condition and operating results could be adversely affected if we are
unable to adequately protect our intellectual property rights.
WE MAY FACE HARMFUL CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS, WHICH
COULD REQUIRE US TO DEVOTE SUBSTANTIAL TIME AND RESOURCES TOWARD MODIFYING
OUR PRODUCTS OR OBTAINING APPROPRIATE LICENSES.
There is a risk that our products infringe on proprietary rights of
third parties. Regardless of whether our products infringe on proprietary rights
of third parties, infringement or invalidity claims may be asserted or
prosecuted against us and we could incur significant expenses in defending them.
If any infringement claims or actions are asserted against us, we may be
required to modify our products or seek licenses for these intellectual property
rights. We may not be able to modify our products or obtain licenses on
commercially reasonable terms, in a timely manner or at all. Our failure to do
so could adversely affect our business by preventing us from selling some or all
of our products.
OUR INABILITY TO MAINTAIN AND DEVELOP NEW STRATEGIC RELATIONSHIPS WITH
PARTNERS AND SUPPLIERS COULD IMPACT OUR ABILITY TO OBTAIN OR SELL OUR
PRODUCTS, AND PREVENT US FROM GENERATING SALES REVENUES.
We obtain and market many of our products through strategic alliance
and supplier agreements. The loss of any of our existing strategic
relationships, or the inability to create new strategic relationships in the
future, could adversely affect our ability to develop and market our products.
We depend upon our partners to develop and market products and to fund
and perform their obligations as contemplated by our agreements with them. We do
not control the time and resources devoted by our partners to these activities.
These relationships may not continue or may require us to spend significant
financial, personnel and administrative resources from time to time. We may not
have the resources available to satisfy our commitments, which may adversely
affect our strategic relationships. Further, our products and services may
compete with the products and services of our strategic partners. This
competition may adversely affect our relationships with our strategic partners,
which could adversely affect our business.
5
If alliance or supplier agreements are cancelled, modified or delayed,
if alliance or supplier partners decide not to purchase our products or to
purchase only limited quantities of our products, or if we are unable to enter
into additional alliance or supplier agreements, our ability to produce and sell
our products and to generate sales revenues could be adversely affected.
ANY COMPROMISE OF PKI TECHNOLOGY WOULD ADVERSELY AFFECT OUR BUSINESS BY
REDUCING OR ELIMINATING DEMAND FOR MANY OF OUR DATA SECURITY PRODUCTS.
Many of our products are based on public key infrastructure, or PKI,
technology, which is the standard technology for securing Internet-based
commerce and communications. The security afforded by this technology depends on
the integrity of a user's private key, which depends in part on the application
of algorithms, or advanced mathematical factoring equations. The occurrence of
any of the following could result in a decline in demand for our data security
products:
o any significant advance in techniques for attacking PKI systems,
including the development of an easy factoring method or faster,
more powerful computers;
o publicity of the successful decoding of cryptographic messages or
the misappropriation of private keys; and
o government regulation limiting the use, scope or strength of PKI.
A SECURITY BREACH OF OUR INTERNAL SYSTEMS OR THOSE OF OUR CUSTOMERS DUE TO
COMPUTER HACKERS OR CYBER TERRORISTS COULD HARM OUR BUSINESS BY ADVERSELY
AFFECTING THE MARKET'S PERCEPTION OF OUR PRODUCTS AND SERVICES.
Since we provide security for Internet and other digital communication
networks, we may become a target for attacks by computer hackers. The ripple
effects throughout the economy of terrorist threats and attacks and military
activities may have a prolonged effect on our potential commercial customers, or
on their ability to purchase our products and services. Additionally, because we
provide security products to the United States government, we may be targeted by
cyber terrorist groups for activities threatened against United States-based
targets.
We will not succeed unless the marketplace is confident that we provide
effective security protection for Internet and other digital communication
networks. Networks protected by our products may be vulnerable to electronic
break-ins. Because the techniques used by computer hackers to access or sabotage
networks change frequently and generally are not recognized until launched
against a target, we may be unable to anticipate these techniques. Although we
have not experienced any act of sabotage or unauthorized access by a third party
of our internal network to date, if an actual or perceived breach of security
for Internet and other digital communication networks occurs in our internal
systems or those of our end-user customers, regardless of whether we caused the
breach, it could adversely affect the market's perception of our products and
services. This could cause us to lose customers, resellers, alliance partners or
other business partners.
6
WE MAY BE EXPOSED TO SIGNIFICANT LIABILITY FOR ACTUAL OR PERCEIVED FAILURE
TO PROVIDE REQUIRED PRODUCTS OR SERVICES.
Products as complex as those we offer may contain undetected errors or
may fail when first introduced or when new versions are released. Despite our
product testing efforts and testing by current and potential customers, it is
possible that errors will be found in new products or enhancements after
commencement of commercial shipments. The occurrence of product defects or
errors could result in adverse publicity, delay in product introduction,
diversion of resources to remedy defects, loss of or a delay in market
acceptance, or claims by customers against us, or could cause us to incur
additional costs, any of which could adversely affect our business. Because our
customers rely on our products for critical security applications, we may be
exposed to claims for damages allegedly caused to an enterprise as a result of
an actual or perceived failure of our products. An actual or perceived breach of
enterprise network or data security systems of one of our customers, regardless
of whether the breach is attributable to our products or solutions, could
adversely affect our business reputation. Furthermore, our failure or inability
to meet a customer's expectations in the performance of our services, or to do
so in the time frame required by the customer, regardless of our responsibility
for the failure, could result in a claim for substantial damages against us by
the customer, discourage customers from engaging us for these services, and
damage our business reputation.
IF USE OF THE INTERNET AND OTHER COMMUNICATION NETWORKS BASED ON INTERNET
PROTOCOLS DOES NOT CONTINUE TO GROW, DEMAND FOR OUR PRODUCTS MAY NOT
INCREASE.
Increased demand for our products largely depends on the continued
growth of the Internet and Internet protocol-based networks and the widespread
acceptance and use of these mediums for electronic commerce and communications.
Because electronic commerce and communications over these networks are evolving,
we cannot predict the size of the market and its sustainable growth rate. A
number of factors may affect market size and growth rate, including increases in
governmental regulation and the continued ability of the Internet infrastructure
and communications services to support growing demands, which ability could be
adversely affected by, among other things, delays in development or adoption of
new standards and protocols to handle increased levels of activity. If the use
of electronic commerce and communications does not increase, or increases more
slowly than we expect, demand for our products and services will be adversely
impacted.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCT AND
SERVICE OFFERINGS COULD BECOME OBSOLETE.
The markets we serve are characterized by rapidly changing technology,
emerging industry standards and frequent introduction of new products. The
introduction of products embodying new technologies and the emergence of new
industry standards may render our products obsolete or less marketable. The
process of developing our products and services is extremely complex and
requires significant continuing development efforts. If we are unable to modify
existing products and develop new products and services that are responsive to
changing technology and standards and to meet customer needs in a timely and
cost effective manner, our business could be adversely affected because we would
be unable to sell our product and service offerings that have become obsolete.
7
DOING BUSINESS WITH THE UNITED STATES GOVERNMENT ENTAILS MANY RISKS THAT
COULD ADVERSELY AFFECT US BY DECREASING THE PROFITABILITY OF GOVERNMENTAL
CONTRACTS WE ARE ABLE TO OBTAIN AND INTERFERING WITH OUR ABILITY TO OBTAIN
FUTURE GOVERNMENTAL CONTRACTS.
Sales to United States government agencies accounted for 18%, 33% and
40% of our consolidated revenues for the year ended December 31, 2002, and the
three and nine months ended September 30, 2003, respectively. Our sales to these
agencies are subject to risks that include:
o early termination of our contracts;
o disallowance of costs upon audit; and
o the need to participate in competitive bidding and proposal
processes, which are costly and time consuming and may result in
unprofitable contracts.
In addition, the government may be in a position to obtain greater
rights with respect to our intellectual property than we would grant to other
entities. Government agencies also have the power, based on financial
difficulties or investigations of their contractors, to deem contractors
unsuitable for new contract awards. Because we engage in the governmental
contracting business, we have been and will be subject to audits and may be
subject to investigation by governmental entities. Failure to comply with the
terms of any of our governmental contracts could result in substantial civil and
criminal fines and penalties, as well as our suspension from future governmental
contracts for a significant period of time, any of which could adversely affect
our business by requiring us to spend money to pay the fines and penalties and
prohibiting us from earning revenues from governmental contracts during the
suspension period.
DELAYS IN DELIVERIES FROM OUR SUPPLIERS OR DEFECTS IN GOODS OR COMPONENTS
SUPPLIED BY OUR VENDORS COULD CAUSE OUR REVENUES AND GROSS MARGINS TO
DECLINE.
We rely on a limited number of vendors for certain components for the
products we are developing. Any undetected flaws in components supplied by our
vendors could lead to unanticipated costs to repair or replace these parts. We
currently purchase some of our components from a single supplier, which presents
a risk that the components may not be available in the future on commercially
reasonable terms or at all. For example, Atmel Corporation has completed
development of a specially designed Forte microprocessor that we have
incorporated into a Forte PKI card. Commercial acceptance of the Forte
microprocessor will be dependent on continued development of applications to
service customer requirements. Any inability to receive or any delay in
receiving adequate supplies of the Forte microprocessor, whether as a result of
delays in development of applications or otherwise, would adversely affect our
ability to sell the Forte PKI card.
We do not anticipate maintaining a supply agreement with Atmel
Corporation for the Forte microprocessor. If Atmel Corporation were unable to
deliver the Forte microprocessor for a lengthy period of time or were to
terminate its relationship with us, we would be unable to produce the Forte PKI
card until we could design a replacement computer chip for the Forte
microprocessor. We anticipate this would take substantial time and resources to
complete, which could result in delays or reductions in product shipments that
could adversely affect our business by requiring us to expend resources while
preventing us from selling the Forte PKI card.
8
Also, if we are unable to obtain or generate sufficient funds to
sustain our operations, we may damage our relationships with our vendors. Slow
and delinquent payments may cause vendors not to sell products to us, or only
with advance payment. If this occurs, we will not have components and services
available for our products. We may not be able to replace any of our supply
sources on economically advantageous terms. Further, if we experience price
increases for the components for our products, we will experience declines in
our gross margins.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR CURRENT MANAGEMENT TEAM.
Our founder, co-chairman, president, and chief operating officer, Kris
Shah, has been with us since 1970, and our co-chairman and chief executive
officer, Marvin Winkler, co-founded one of our wholly-owned subsidiaries. Their
experience, expertise, industry knowledge and historical company knowledge would
be extremely difficult to replace if we were to lose the services of either of
them. The precise impact of the loss of services of either of them is difficult
to predict, but would likely result in, at a minimum, significant costs to
recruit, hire and retain a successor and impaired operating results while the
successor was being recruited and transitioning into the position. We do not
currently maintain key-man life insurance on the lives of either of these
officers.
THERE IS SIGNIFICANT COMPETITION IN OUR INDUSTRY FOR HIGHLY SKILLED
EMPLOYEES, AND OUR FAILURE TO ATTRACT AND RETAIN TECHNICAL PERSONNEL WOULD
ADVERSELY AFFECT OUR BUSINESS BY IMPAIRING OUR ABILITY TO EFFICIENTLY
CONDUCT OUR OPERATIONS.
We may not be able to attract or retain highly skilled employees. Our
inability to hire or retain highly qualified individuals may impede our ability
to develop, install, implement and service our software and hardware systems, to
retain existing customers and attract new customers, or to efficiently conduct
our operations, all of which would adversely affect our business. A high level
of employee mobility characterizes the data security and networking solution
industries, and the market for highly qualified individuals in computer-related
fields is intense. This competition means there are fewer highly qualified
employees available to hire, and the costs of hiring and retaining these
individuals are high. Even if we are able to hire these individuals, we may be
unable to retain them. Furthermore, the hiring and retention of technical
employees necessitates the issuance of stock options and other equity interests,
which may dilute earnings per share.
OUR EFFORTS TO EXPAND OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER
OF RISKS, ANY OF WHICH COULD ADVERSELY AFFECT OUR FUTURE INTERNATIONAL
SALES.
We have obtained approvals to export certain of our products and we
plan to increase our international sales. Our inability to obtain or maintain
federal or foreign regulatory approvals relating to the import or export of our
products on a timely basis could adversely affect our ability to expand our
international business. Additionally, our international operations could be
subject to a number of risks, any of which could adversely affect our future
international sales, including:
o increased collection risks;
o trade restrictions;
o export duties and tariffs;
o uncertain political, regulatory and economic developments; and
o inability to protect our intellectual property rights.
9
WE ARE UNABLE TO PREDICT THE EXTENT TO WHICH THE RESOLUTION OF LAWSUITS OR
CLAIMS PENDING AGAINST US AND OUR SUBSIDIARY COULD ADVERSELY AFFECT OUR
BUSINESS BY, AMONG OTHER THINGS, SUBJECTING US TO SUBSTANTIAL COSTS AND
LIABILITIES AND DIVERTING MANAGEMENT'S ATTENTION AND RESOURCES.
G2 Resources, Inc. and Classical Financial Services, LLC have filed
complaints against one of our subsidiaries, Pulsar Data Systems, Inc., or
Pulsar, alleging that Pulsar breached a contract by failing to make payments to
G2 Resources, Inc. in connection with services allegedly provided by G2
Resources, Inc. In April 2001, the court dismissed, for lack of prosecution
activity for more than twelve months, the original complaint that G2 Resources,
Inc. had filed against Pulsar in January 1998. G2 Resources, Inc. re-filed the
action in May 2001. In 2002, the court moved this case into the same division
handling other matters related to G2 and Classic Financial Services, LLC, and
stayed any further action in this case pending the resolution of matters between
G2 and Classical. We have been vigorously defending ourselves against the
plaintiffs' claims and have asserted defenses and counterclaims.
In June 2002, Research Venture, LLC filed two lawsuits against us
alleging unlawful detainer and seeking possession of two leased properties,
alleged damages and lost rent. In October 2002, we negotiated a restructuring of
our obligations under the leases. We subsequently defaulted on those
obligations, and Research Venture obtained a judgment against us per prior
stipulation in the amount of $2.7 million. In August 2003, we entered into a
settlement agreement with Research Venture that imposes, among other things,
registration obligations on us regarding shares of common stock that we issued
to Research Venture. As of December 5, 2003, we were not in compliance with
those obligations, which means that Research Venture may be entitled to entry of
a stipulated judgment against us in an amount up to $373,000.
In June 2003, Venetian Casino Resort, LLC, or the Venetian, sent a
demand letter to our subsidiary demanding funding, or alternatively taking
action to terminate our subsidiary's operating agreement for failure of our
subsidiary to meet its funding commitment and threatening to take action against
our subsidiary in the matter. Subsequently, the Venetian sent a letter claiming
to terminate the operating agreement. In the quarter ended June 30, 2003, we
recorded an impairment charge of $142,000, which was equal to the remaining book
value of our investment in our subsidiary.
In December 2003, Shane Brophy, an ex-employee, filed a lawsuit
alleging causes of action for breach of employment contract, unpaid wages and
wrongful termination in violation of public policy arising from our termination
of his employment in July 2003. We have not yet responded to the complaint and
no discovery has been conducted. Therefore, we cannot quantify the outcome or
exposure. However, we strongly deny the claims and believe the complaint is
without merit. We may assert claims for damages against Mr. Brophy.
Any or all of these litigation matters and claims could subject us to
substantial costs and liabilities and divert our management's attention and
resources during our current and future financial reporting periods. If we
believe it is probable that we will incur an estimable amount of expenses in
connection with a litigation matter, we will include the estimated amount of
expenses in accounts payable or accrued liabilities. If we feel unable to make a
reasonable judgment as to the ultimate outcome of, or to assess or quantify our
exposure relating to, a litigation matter, we will not include in our financial
statements an estimated amount of expenses for that matter. Consequently, if we
are unable during any financial reporting period to accurately estimate our
potential liability in connection with a litigation matter, our financial
condition and results of operations in future financial reporting periods may be
adversely affected when we record any unreserved costs or liabilities we
actually have incurred in connection with a litigation matter.
GOVERNMENTAL REGULATIONS AFFECTING SECURITY OF INTERNET AND OTHER DIGITAL
COMMUNICATION NETWORKS COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES.
The United States government and foreign governments have imposed
controls, export license requirements and restrictions on the import or export
of some technologies, including encryption technology. Any additional
governmental regulation of imports or exports or failure to obtain required
export approval of encryption technologies could delay or prevent the acceptance
and use of encryption products and public networks for secure communications and
could limit the market for our products and services. In addition, some foreign
competitors are subject to less rigorous controls on exporting their encryption
technologies. As a result, they may be able to compete more effectively than us
in the United States and in international security markets for Internet and
other digital communication networks. In addition, governmental agencies such as
the Federal Communications Commission periodically issue regulations governing
the conduct of business in telecommunications markets that may negatively affect
the telecommunications industry and us.
10
BIZ ACQUISITION-RELATED ACCOUNTING CHARGES MAY CONTINUE TO DELAY OR REDUCE
OUR PROFITABILITY AND CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO
DECLINE.
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." We adopted this statement effective January 1, 2002. Under
this statement, goodwill is no longer amortized and is subject to periodic
testing for impairment beginning January 1, 2002. The provisions of this
statement require us to perform a two-step test to assess goodwill for
impairment. In the first step, we compare the fair value of each reporting unit
to its carrying value. If the fair value exceeds the carrying value, then
goodwill is not impaired and we need not proceed to the second step. If the
carrying value of a reporting unit exceeds its fair value, then we must
determine and compare the implied fair value of the reporting unit's goodwill to
the carrying value of its goodwill. If the carrying value of the reporting
unit's goodwill exceeds its implied fair value, then we will record an
impairment loss in the amount of the excess.
We accounted for our August 2001 acquisition of BIZ as a purchase.
Under the purchase method of accounting, the purchase price was allocated to the
fair value of the identifiable tangible and intangible assets and liabilities
that we acquired from BIZ. The excess of the purchase price over BIZ's tangible
net assets resulted in goodwill and other intangible assets. As of September 30,
2003, we had goodwill in the amount of $25.9 million.
We are required to perform tests for impairment at least annually, or
more frequently if events occur or circumstances change that would more likely
than not reduce the fair value of the net carrying amount. We cannot predict
whether or when there will be additional impairment charges, or the amount of
any such charges. If the charges are significant, they could cause the market
price of our common stock to decline.
DEFAULTS UNDER OUR SECURED CREDIT ARRANGEMENTS COULD RESULT IN A
FORECLOSURE ON OUR ASSETS BY OUR CREDITORS.
All of our assets are pledged as collateral to secure portions of our
debt. We were not able to obtain waivers for past covenant defaults, and we may
in the future default under certain covenants of these credit arrangements. This
means that if we are unable to obtain waivers in the future or if we incur a
monetary default on our secured debt obligations, our indebtedness could become
immediately due and payable and the lenders could foreclose on our assets.
WE MAY RELOCATE A PORTION OF OUR SOFTWARE DEVELOPMENT TO INDIA, WHICH COULD
PROVE TO BE UNPROFITABLE DUE TO RISKS INHERENT IN INTERNATIONAL BUSINESS
ACTIVITIES.
We have contracted portions of our commercial software development
activities to India in an effort to reduce our operating expenses. We are
subject to a number of risks associated with international business activities
that could adversely affect any operations we may develop in India and could
slow our growth. These risks generally include, among others:
o difficulties in managing and staffing our Indian operations;
o difficulties in obtaining or maintaining regulatory approvals or
in complying with Indian laws;
11
o reduced or less certain protection for intellectual property
rights;
o differing technological advances, preferences or requirements;
o trade restrictions;
o foreign currency fluctuations; and
o general economic conditions, including instability, in the Indian
market.
Any of these risks could adversely affect our business and results of
operations.
CONFLICTS INVOLVING INDIA COULD ADVERSELY AFFECT ANY OPERATIONS WE MAY
ESTABLISH IN INDIA, WHICH COULD INTERFERE WITH OUR ABILITY TO CONDUCT ANY
OR ALL OF OUR OTHER OPERATIONS.
South Asia has from time to time experienced civil unrest and
hostilities among neighboring countries, including India and Pakistan. In April
1999, India and Pakistan conducted long-range missile tests. Since May 1999,
military confrontations between India and Pakistan have occurred in disputed
regions. In October 1999, the leadership of Pakistan changed as a result of a
coup led by the military. Additionally, other events have heightened the
tensions between India and Pakistan. If a major armed conflict or nuclear war
involving India and any of its neighboring countries occurs, it could, among
other things, prevent us from establishing or maintaining operations in India.
If the successful conduct of operations in India becomes critical to any or all
of our other operations, our business would be harmed to the extent we are
unable to establish or maintain operations in India.
WE ARE EXPOSED TO LIABILITY FOR ACTIONS TAKEN BY OUR DOMESTIC EMPLOYEES
WHILE ON ASSIGNMENT AND MAY ALSO BE EXPOSED TO LIABILITY FOR ACTIONS TAKEN
BY ANY FOREIGN EMPLOYEES WE MAY HIRE.
As a professional services provider, a portion of our business involves
employing people and placing them in the workplace of other businesses.
Therefore, we are exposed to liability for actions taken by our employees while
on assignment. In addition, to the extent we hire employees in India or other
foreign locations, we may also be exposed to liability for actions taken by
those employees in the scope of their employment.
RISKS RELATED TO THIS OFFERING
THE RECENTLY COMPLETED SERIES A CONVERTIBLE PREFERRED STOCK FINANCING AND
WARRANT ISSUANCE WERE HIGHLY DILUTIVE, WHICH MAY CAUSE OUR STOCK PRICE TO
FALL.
On November 19, 2003, we issued shares of Series A Convertible
Preferred Stock, convertible promissory notes, investor warrants and placement
agent and exchange agent warrants that will become exercisable for or
convertible after our 2003 annual stockholders' meeting into up to approximately
37,610,000 shares of common stock. The initial exercise and conversion prices of
these securities ranged from $0.01 per share to $1.50 per share, which means
that most of these derivative securities had exercise or conversion prices that
were below the $1.19 closing sale price of our common stock on that date.
Therefore, the issuance of shares upon exercise or conversion of these
derivative securities will be highly dilutive to the voting power and value of
our common stock and could cause our stock price to fall.
12
THE NON-CASH INTEREST EXPENSE REQUIRED IN CONNECTION WITH THE DETACHABLE
WARRANTS AND BENEFICIAL CONVERSION FEATURES OF OUR APRIL 2002 FINANCING AND
THE SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS ISSUED IN NOVEMBER
2003 MAY ADVERSELY AFFECT OUR STOCK PRICE.
The secured convertible promissory notes we issued in April 2002 and
the Series A Convertible Preferred Stock and replacement notes we issued in
November 2003 are or will become convertible into shares of our common stock at
a conversion price below the market price of our common stock at the commitment
date for each of those securities. In addition, the securities were accompanied
by common stock purchase warrants with an exercise price below the market price
of our common stock at the commitment date. Accordingly, under accounting
guidelines, we were required to record a substantial non-cash charge as interest
expense for the April 2002 notes and may record similar non-cash items for the
Series A Convertible Preferred Stock and the warrants. These non-cash charges
substantially increased our reported loss for the year ended December 31, 2002,
over the amount that would have otherwise been reported and will substantially
increase our reported loss for the year ended December 31, 2003, over the amount
that would have otherwise been reported. The increases in our reported losses
may cause a decline in our stock price.
OUR COMMON STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS AND IN LITIGATION AGAINST US.
The stock market as a whole and individual stocks historically have
experienced extreme price and volume fluctuations, which often have been
unrelated to the performance of the related corporations. During the 52-week
period ended December 5, 2003, the high and low closing sale prices of our
common stock were $1.84 and $0.50, respectively. The market price of our common
stock may exhibit significant fluctuations in the future in response to various
factors, many of which are beyond our control and which include:
o variations in our annual or quarterly financial results, which
variations could result from, among other things, the timing,
size, mix and customer acceptance of our product and service
offerings and those of our competitors, and the timing and
magnitude of required capital expenditures;
o company-issued earnings announcements that vary from consensus
analyst estimates;
o changes by financial research analysts in their recommendations or
estimates of our earnings;
o conditions in the economy in general or in the information
technology service sector in particular;
o announcements of technological innovations or new products or
services by us or our competitors; and
o unfavorable publicity or changes in applicable laws and
regulations, or their judicial or administrative interpretations,
affecting the information technology service sector and us.
If our operating results in future quarters fall below the expectations
of market makers, securities analysts and investors, the price of our common
stock likely will decline, perhaps substantially. In the past, securities class
action litigation often has been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management's attention and resources.
Consequently, the price at which investors purchase shares of our common stock
may not be indicative of the price that will prevail in the trading market.
Investors may be unable to sell their shares of common stock at or above their
purchase price, which may result in substantial losses.
13
A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK ARE OR WILL BECOME
ELIGIBLE FOR PUBLIC SALE, AND SALES OF LARGE NUMBERS OF OUR SHARES COULD
ADVERSELY AFFECT THEIR MARKET PRICE AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL, IF NEEDED, THROUGH SALES OF EQUITY SECURITIES.
As of December 15, 2003, we had issued and outstanding 28,050,177
shares of common stock, a majority of which were unrestricted, were eligible for
resale without registration under Rule 144 of the Securities Act of 1933, or
were registered for resale or issued with registration rights. In addition, we
were obligated to register for resale approximately 45,922,000 shares of common
stock that were issuable or may become issuable under derivative securities that
were outstanding as of that date. Our common stock historically has been thinly
traded. While our recent trading activity has increased, our average daily
trading volume between December 16, 2002 and December 15, 2003 was 66,682
shares. If our stockholders seek to sell numbers of shares significantly in
excess of our typical volume, the market price of our shares may decline. Any
adverse effect on the market price for our common stock could make it more
difficult for us to sell equity securities at a time and at a price that we deem
appropriate.
THE MARKET PRICE OF OUR COMMON STOCK COULD SUBSTANTIALLY DECLINE IF ALL OR
A SIGNIFICANT PORTION OF OUR OUTSTANDING DERIVATIVE SECURITIES WERE
CONVERTED INTO OR EXERCISED FOR SHARES OF OUR COMMON STOCK AND RESOLD INTO
THE MARKET, OR IF A PERCEPTION EXISTS THAT A SUBSTANTIAL NUMBER OF SHARES
WILL BE ISSUED UPON CONVERSION OR EXERCISE AND THEN RESOLD INTO THE MARKET.
As of December 15, 2003, we had outstanding 28,050,177 shares of common
stock and also had outstanding options, warrants, and promissory notes that were
then exercisable for or convertible into approximately 6,340,000 shares of our
common stock, and additional options, warrants, promissory notes and shares of
preferred stock that could become exercisable or convertible into up to
approximately 39,650,000 shares of our common stock. If the conversion or
exercise prices at which our outstanding derivative securities are converted or
exercised are lower than the market price, immediate dilution will occur. In
addition, sales of a substantial number of shares of common stock issued upon
conversion or exercise of our outstanding derivative securities, or even the
perception that such sales could occur, could adversely affect the market price
of our common stock. Therefore, a substantial decline in the value of our shares
could result from both the actual and potential conversion or exercise of our
outstanding derivative securities and the actual and potential resale of the
underlying shares into the market.
IF WE ARE UNSUCCESSFUL IN COMPLYING WITH OUR SECURITIES REGISTRATION
OBLIGATIONS, WE MAY BE IN DEFAULT UNDER VARIOUS AGREEMENTS AND COULD FACE
SIGNIFICANT PENALTIES AND A SUBSTANTIAL STIPULATED JUDGMENT.
The agreements we entered into in connection with our issuance of
secured convertible promissory notes and related warrants, our preferred stock
and related warrants and in connection with settlement of litigation require us
to, among other things, register for resale the shares of common stock issued or
issuable under those arrangements and to maintain the effectiveness of the
registration statements for an extended period of time. If we are unable to
timely obtain and maintain effectiveness of the required registration statements
or obtain appropriate waivers or if we default under the arrangements for any
other reason, then the holders of the notes could, among other things, require
us to pay substantial penalties, require us to repay the notes at a premium
and/or foreclose upon their security interest in our assets, the parties to the
settlement arrangements could take action against us that could include the
filing of a substantial stipulated judgment, and the holders of the preferred
stock and related warrants could require us to redeem their shares of preferred
stock at a substantial premium. Any of these events would adversely affect our
business, operating results, financial condition, and ability to service our
other indebtedness by negatively impacting our cash flows.
14
A SMALL NUMBER OF STOCKHOLDERS, WHO INCLUDE CERTAIN OF OUR OFFICERS AND
DIRECTORS, HAVE THE ABILITY TO CONTROL STOCKHOLDER VOTES AND TO TAKE ACTION
BY WRITTEN CONSENT WITHOUT A MEETING OF STOCKHOLDERS.
As of December 15, 2003, our co-chairmen, Kris Shah and Marvin Winkler
and certain of their family members and affiliates owned, in the aggregate,
approximately 44.3% of our outstanding common stock. Those stockholders, if
acting together with several other stockholders, have the ability to elect our
directors and to determine the outcome of corporate actions requiring
stockholder approval, irrespective of how our other stockholders may vote.
Further, those stockholders have the ability to take action by written consent
on those matters without a meeting of stockholders. Those matters could include
the election of directors, changes in the size and composition of the board of
directors, and mergers and other business combinations involving our company. In
addition, through control of the board of directors and voting power, they may
be able to control certain decisions, including decisions regarding the
qualification and appointment of officers, dividend policy, access to capital
(including borrowing from third-party lenders and the issuance of additional
equity securities), and the acquisition or disposition of our assets. Also, the
concentration of voting power in the hands of those individuals could have the
effect of delaying or preventing a change in control of our company, even if the
change in control would benefit our stockholders, and may adversely affect the
market price of our common stock.
15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and our filings that are incorporated by reference into
this prospectus contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. We intend that those forward-looking statements be subject to the safe
harbors created by those sections.
Those forward-looking statements generally include the plans and
objectives of management for future operations, including plans and objectives
relating to our future economic performance, and can generally be identified by
the use of the words "believe," "intend," "plan," "expect," "forecast,"
"project," "may," "should," "could," "seek," "pro forma," "estimates,"
"continues," "anticipate" and similar words. Those forward-looking statements
and associated risks may include, relate to, or be qualified by other important
factors, including, without limitation:
o anticipated trends in our financial condition and results of
operations;
o growth or contraction in the information security products and
services markets in which we operate;
o our ability to finance our working capital and other cash
requirements;
o our business strategy for expanding our presence in the Internet
data security market; and
o our ability to distinguish ourselves from our current and future
competitors.
We do not undertake to update, revise or correct any forward-looking
statements. The forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. Important
factors to consider in evaluating forward-looking statements include:
o the shortage of reliable market data regarding the Internet data
security market;
o changes in external competitive market factors or in our internal
budgeting process that might impact trends in our results of
operations; and
o changes in our business strategy or an inability to execute our
strategy due to unanticipated changes in the contract support
services markets.
The information contained in this prospectus is not a complete
description of our business or the risks associated with an investment in our
common stock. Before deciding to buy or maintain a position in our common stock,
you should carefully review and consider the various disclosures we made in this
prospectus, and in our other materials filed with the Securities and Exchange
Commission ("Commission") that discuss our business in greater detail and that
disclose various risks, uncertainties and other factors that may affect our
business, results of operations or financial condition. In particular, you
should review the "Risk Factors" section of this prospectus. Any of the factors
described above or in the "Risk Factors" section of this prospectus could cause
our financial results, including our net income (loss) or growth in net income
(loss) to differ materially from prior results, which in turn could, among other
things, cause the price of our common stock to fluctuate substantially.
16
SELLING SECURITY HOLDERS
SELLING SECURITY HOLDER TABLE
This prospectus covers the offer and sale by the selling security
holders of up to an aggregate of 51,150,107 shares of common stock, including an
aggregate of 5,228,572 issued and outstanding shares of our common stock and an
aggregate of 45,921,535 shares of our common stock underlying warrants,
convertible promissory notes, options and convertible preferred stock. Each
selling security holder has indicated to us that it is acting individually, not
as a member of a group. The following table sets forth, to our knowledge,
certain information about the selling security holders as of the date of the
table, based on information furnished to us by the selling security holders.
Except as indicated in the private placement descriptions or footnotes following
the table, none of the selling security holders or their affiliates has held any
position or office or had any other material relationship with us in the past
three years.
Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting or investment power with respect to the
securities. To our knowledge, except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table below
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. Except as described below in connection
with beneficial ownership limitations, shares of common stock underlying
derivative securities, if any, that currently are exercisable or convertible or
are scheduled to become exercisable or convertible for or into shares of common
stock within 60 days after the date of the table are deemed to be outstanding in
calculating the percentage ownership of each listed person or group but are not
deemed to be outstanding as to any other person or group. Percentage of
beneficial ownership is based on 28,050,177 shares of common stock outstanding
as of December 15, 2003, the date of the table.
The terms of the retained notes and the April 2002 warrants, as well as
the terms of other warrants, which include A-1 and A-2 warrants issued with the
Series A Convertible Preferred Stock ("Series A Preferred"), warrants issued
with additional retained notes, placement agent warrants, exchange agent
warrants, and shares of Series A Preferred held by some of the selling security
holders, prohibit conversion or exercise of those derivative securities to the
extent that conversion or exercise of those derivative securities would result
in the holder, together with its affiliates, beneficially owning in excess of
4.999% of our outstanding shares of common stock. The rules of The Nasdaq
National Market require us to obtain stockholder approval before we may issue a
number of shares of common stock, or securities exercisable for or convertible
into common stock, equal to or greater than 20% of the number of shares of our
common stock outstanding prior to the issuance, if the issuance is for a price
that is less than the greater of the book value or market value of our common
stock at the time of issuance. Conversions of shares of Series A Preferred and
additional retained notes, exercises of additional retained warrants, and
conversions or exercises of certain other derivative securities are subject to
this 20% limitation unless and until we obtain stockholder approval. We
anticipate, but cannot offer assurance, that we will obtain stockholder approval
at our 2003 annual stockholders' meeting and that the 20% limitation will
thereafter no longer apply.
A holder of one of the retained notes or April 2002 warrants or certain
other warrants that contain beneficial ownership limitations may waive the
4.999% limitation after 61 days' prior written notice to us, or immediately upon
written notice to us if we are or may become subject to a change in control as
defined in the retained notes and the April 2002 warrants. The 4.999% beneficial
ownership limitation that relates to the Series A Preferred may only be altered
or removed with the vote or written approval of a majority of the outstanding
shares of our common stock and the written approval of holders of at least 50%
of the outstanding shares of Series A Preferred. As of the date of the table,
the 4.999% beneficial ownership limitations had not been waived or altered.
However, the beneficial ownership limitations do not preclude a holder from
converting or exercising a derivative security and selling the shares underlying
the derivative security in stages over time where each stage does not cause the
holder and its affiliates to beneficially own shares in excess of the limitation
amount. As a result of the beneficial ownership limitations, the numbers of
shares shown in the table as beneficially owned by certain of the selling
security holders have been reduced as described in the footnotes to the table.
17
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the accounts of
the selling security holders described below. Each of William Blair & Company,
L.L.C., RBC Dain Rauscher, Inc. and Roth Capital Partners, LLC is an NASD-member
firm and, therefore, is deemed by the Commission to be acting as underwriter as
to the shares such firm is offering under this prospectus. We have indicated in
the footnotes to the table which of the selling security holders have indicated
that he or it is affiliated with an NASD-member firm or is a member of the
American Stock Exchange. Each of those selling security holders has represented
to us that he or it is not acting as an underwriter in this offering, he or it
purchased or received the securities to be resold by him or it under this
prospectus in the ordinary course of business, and at the time of such purchase
or receipt, he or it had no agreements or understandings, directly or
indirectly, with any person to distribute the securities.
SHARES OF
COMMON STOCK SHARES OF
BENEFICIALLY OWNED SHARES OF COMMON STOCK
PRIOR TO COMMON BENEFICIALLY OWNED
OFFERING STOCK AFTER OFFERING (1)
NAME OF --------------------------- BEING -------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------- ------ ---------- ------- ------ ----------
RBC Dain Rauscher, Inc. 4,050 (2) * 4,050 -- --
Douglas J. Burke 1,650 (3) * 1,650 -- --
Forbes W. Burtt 2,000 (4) * 2,000 -- --
William M. Hannan 400 (5) * 400 -- --
Crestview Capital Fund, L.P. (6) 1,451,240 (7) 4.99% 3,307,577 (8) -- --
Crestview Capital Fund II, L.P. (6) 1,455,909 (9) 4.99% 2,662,188 (10) -- --
Crestview Offshore Fund, Inc. (6) 73,891 (11) * 73,891 (11) -- --
Richard P. Kiphart 2,064,496 (12) 7.33% 14,798,403 (13) -- --
Nefilim Associates, LLC 475,913 (14) 1.67% 536,094 (15) -- --
Robert Geras 731,219 (16) 2.54% 782,757 (17) -- --
William Blair & Company, L.L.C. 110,000 (18) * 110,000 (18) -- --
AMG Financing Capital, Inc. 12,500 (19) * 12,500 -- --
Robert J. Gray 174,628 (20) * 21,374 153,254 (21) *
Alpha Capital AG 756,597 (22) 2.63% 828,750 (23) -- --
Barucha LLC 151,319 (24) * 165,750 (25) -- --
Bay Star Capital II, LP 1,476,014 (26) 4.99% 2,839,462 (27) -- --
Bristol Investment Fund, Ltd. 983,576 (28) 3.39% 1,077,375 (29) -- --
Clarion Offshore Fund, Ltd. 226,979 (30) * 248,625 (31) -- --
Clarion Partners, L.P. 226,979 (30) * 248,625 (31) -- --
18
SHARES OF
COMMON STOCK SHARES OF
BENEFICIALLY OWNED SHARES OF COMMON STOCK
PRIOR TO COMMON BENEFICIALLY OWNED
OFFERING STOCK AFTER OFFERING (1)
NAME OF --------------------------- BEING -------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------- ------ ---------- ------- ------ ----------
David Wiener Revocable Trust - 96 60,528 (32) * 66,300 (33) -- --
Ellis International Limited Inc. 650,674 (34) 2.27% 712,725 (35) -- --
Gamma Opportunity Capital Partners, LP 650,674 (36) 2.27% 712,725 (37) -- --
Greenwich Growth Fund Ltd. 151,319 (38) * 165,750 (39) -- --
Generation Capital Associates 408,563 (40) 1.44% 447,525 (41) -- --
Herman Shtern 75,660 (42) * 82,875 (43) -- --
Jack Gilbert 75,660 (44) * 82,875 (45) -- --
Jeff Hermanson 45,396 (46) * 49,725 (47) -- --
Lucrative Investments 75,660 (48) * 82,875 (49) -- --
Magellan International Ltd. 332,903 (50) 1.17% 364,650 (51) -- --
Mark Capital LLC 60,528 (52) * 66,300 (53) -- --
Matthew Balk 135,334 (54) * 141,106 (55) -- --
Michael Loew 45,396 (46) * 49,725 (47) -- --
North Bar Capital Inc. 45,396 (56) * 49,725 (47) -- --
Platinum Partners Value Arbitrage
Fund LP 453,958 (57) 1.59% 497,250 (58) -- --
Portside Growth and Opportunity Fund 453,958 (59) 1.59% 497,250 (58) -- --
Professional Traders Fund, LLC 302,639 (60) 1.07% 331,500 (61) -- --
RHP Master Fund, Ltd. 1,476,014 (62) 4.99% 2,370,225 (63) -- --
Riaz Ahmed Don 151,319 (64) * 165,750 (39) -- --
Richard Weiner 45,396 (46) * 49,725 (47) -- --
Robert A. Melnick 45,396 (46) * 49,725 (47) -- --
Robert J. Neborsky M.D., Inc.,
Combination Retirement Trust 105,924 (65) * 116,025 (66) -- --
SDS Capital Group SPC Ltd 1,476,014 (67) 4.99% 2,839,463 (68) -- --
Stonestreet LP 650,674 (69) 2.27% 712,725 (70) -- --
Vertical Ventures, LLC 650,674 (71) 2.27% 712,725 (70) -- --
WEC Partners LLC 211,847 (72) * 116,025 (73) -- --
West End Convertible Fund L.P. 105,924 (74) * 116,025 (73) -- --
Whalehaven Fund Limited 151,319 (75) * 165,750 (39) -- --
Zenny Trading Ltd. 590,146 (76) 2.06% 646,425 (77) -- --
19
SHARES OF
COMMON STOCK SHARES OF
BENEFICIALLY OWNED SHARES OF COMMON STOCK
PRIOR TO COMMON BENEFICIALLY OWNED
OFFERING STOCK AFTER OFFERING (1)
NAME OF --------------------------- BEING -------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------- ------ ---------- ------- ------ ----------
Castle Creek Technology Partners, LLC 650,674 (78) 2.27% 712,725 (79) -- --
Richard Melnick 45,396 (46) * 49,725 (47) -- --
Michael S. Liss 75,660 (48) * 82,875 (49) -- --
SF Capital Partners Ltd. 650,674 (80) 2.27% 712,725 (79) -- --
Fred and Delay Vallen 30,264 (81) * 33,150 (82) -- --
Stephan Rupp 45,396 (46) * 49,725 (47) -- --
George Manos 45,396 (46) * 49,725 (47) -- --
Sean M Callahan 45,396 (46) * 49,725 (47) -- --
SDIRA FBO: Alan E. Ennis SEP IRA 30,264 (83) * 33,150 (82) -- --
Timothy Sledz 45,396 (46) * 49,725 (47) -- --
John Simonelli 30,264 (81) * 33,150 (82) -- --
Frederic Bauthier 181,583 (84) * 198,900 (85) -- --
Dana E. Ennis 90,792 (86) * 99,450 (87) -- --
Christopher Choma 45,396 (46) * 49,725 (47) -- --
Roger & Divina Lockhart C.R.U.T. 45,396 (88) * 49,725 (47) -- --
Philip Bird 90,792 (86) * 99,450 (87) -- --
Peter A. Yaskowitz 45,396 (46) * 49,725 (47) -- --
Greg Downes 45,396 (46) * 49,725 (47) -- --
Tom Franco 45,396 (46) * 49,725 (47) -- --
Julie L. Michael 181,583 (84) * 198,900 (85) -- --
Ralph Rybacki 151,319 (89) * 165,750 (39) -- --
Rosen & Eichner 401K Profit
Sharing Plan 45,396 (46) * 49,725 (47) -- --
Charles P. Strogen 181,583 (84) * 198,900 (85) -- --
Thomas Beard 30,264 (81) * 33,150 (82) -- --
Harry Falterbauer 60,528 (52) * 66,300 (53) -- --
Jerdan Enterprises, Inc. 348,035 (90) 1.23% 381,225 (91) -- --
National Financial Services LLC,
Phil Clark IRA R/O 105,924 (92) * 116,025 (79) -- --
Alan R. Cohen 45,396 (46) * 49,725 (47) -- --
James Lehman 45,396 (46) * 49,725 (47) -- --
Oscar Garza 45,396 (46) * 49,725 (47) -- --
20
SHARES OF
COMMON STOCK SHARES OF
BENEFICIALLY OWNED SHARES OF COMMON STOCK
PRIOR TO COMMON BENEFICIALLY OWNED
OFFERING STOCK AFTER OFFERING (1)
NAME OF --------------------------- BEING -------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------- ------ ---------- ------- ------ ----------
John Jay Gebhardt 60,528 (93) * 66,300 (53) -- --
Robert Hermanos 30,264 (81) * 33,150 (82) -- --
Stuart Jacobson 166,451 (94) * 182,325 (95) -- --
North Metropolitan Radiology
Assoc., LP 401K Profit Sharing -- --
Plan FBO: Stuart Jacobson 60,528 (96) * 66,300 (53)
Robert Klein & Myriam Gluck 90,792 (86) * 99,450 (87) -- --
Allen Weiss 45,396 (46) * 49,725 (47) -- --
RA Schafer 45,396 (46) * 49,725 (47) -- --
Robert Kinney 30,264 (81) * 33,150 (82) -- --
Joseph R. McCandless 45,396 (97) * 49,725 (47) -- --
Charles & Kathleen Doller 96,116 (98) * 49,725 (99) -- --
National Financial Services LLC,
Julius H. Roma IRA R/O 60,528 (100) * 66,300 (53) -- --
Thomas Contino 30,264 (81) * 33,150 (82) -- --
Robert Cymbala 45,396 (46) * 49,725 (47) -- --
Dan Foley 30,264 (81) * 33,150 (82) -- --
SDS Merchant Fund, L.P. 1,476,014 (101) 4.99% 2,203,525 (102) -- --
Kris & Geraldine Shah Family Trust 4,906,045 (103) 17.49% 7,105 4,898,940 17.46%
JAW Financial, L.P. 5,705,023 (104) 20.34% 2,369 5,702,654 20.33%
Integral Systems, Inc. 150,000 (105) * 150,000 (105) -- --
Research Venture, LLC 466,950 (106) 1.66% 466,950 -- --
Pacific Crest Securities, Inc. 133,200 (107) * 133,200 (107) -- --
Bluestone Partners, L.P. 236,800 (107) * 236,800 (107) -- --
Roth Capital Partners, LLC 23,756 (108) * 23,756 (108) -- --
Wave Systems Corp. 4,550,583 (109) 16.22% 1,800,000 2,750,583 9.81%
Burnham Hill Holdings, LLC 963,000 (110) 3.32% 963,000 (110) -- --
Hilary G. Bergman 58,803 (111) * 58,803 (111) -- --
Bradley C. Reifler 58,803 (112) * 58,803 (112) -- --
Eric Singer 20,681 (113) * 20,681 (113) -- --
Kimball & Cross Investment
Management Corp. 5,830 (114) * 5,830 (114) -- --
Hudson Valley Capital Management,
LLC 50,720 (115) * 50,720 (115) -- --
21
SHARES OF
COMMON STOCK SHARES OF
BENEFICIALLY OWNED SHARES OF COMMON STOCK
PRIOR TO COMMON BENEFICIALLY OWNED
OFFERING STOCK AFTER OFFERING (1)
NAME OF --------------------------- BEING -------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------- ------ ---------- ------- ------ ----------
Chris Shufeldt 1,750 (116) * 1,750 (116) -- --
Brian Herman 27,040 (117) * 27,040 (117) -- --
Sean Callahan 7,600 (118) * 7,600 (118) -- --
Mark Ford 12,960 (119) * 12,960 (119) -- --
Daniel Pietro 900 (120) * 900 (120) -- --
Claude Ware 4,000 (121) * 4,000 (121) -- --
James St. Clair 6,000 (122) * 6,000 (122) -- --
Roger Lockhart 46,896 (123) * 1,500 (124) -- --
__________________
* Less than 1.00%
(1) The figures shown assume the sale of all shares being offered under
this prospectus.
(2) Power to vote or dispose of the shares beneficially owned by RBC Dain
Rauscher, Inc. is held by RBC Dain Rauscher, Corp. The individuals
authorized to act on behalf of RBC Dain Rauscher, Corp. in the voting
and disposition of the shares are Irving Weiser, Lisa A. Ferris,
Lawrence C. Holtz, Michelle R. White, Peter Armenio, Peter M. Grant,
Maria T. Malark and Mary E. Zimmer.
(3) Douglas J. Burke is a managing director of Montgomery & Co. LLC, an
NASD-member firm.
(4) Forbes W. Burtt is a managing director of Wedbush Morgan Securities, an
NASD-member firm.
(5) William Hannan is a former employee of Tucker Anthony Sutro Capital
Markets, a former NASD-member firm that merged with RBC Dain Rauscher,
Inc.
(6) Crestview Capital Partners, LLC controls three funds listed in the
above table: Crestview Capital Fund, L.P., Crestview Capital Fund II,
L.P. and Crestview Offshore Fund, Inc. Power to vote or dispose of the
shares beneficially owned by each of each of Crestview Capital Fund,
L.P., Crestview Capital Fund II, L.P. and Crestview Offshore Fund, Inc.
is held by Stewart Flink and Richard Levy. Stewart Flink owns Dillon
Capital, Inc., an NASD-member firm.
(7) Includes 470,810 outstanding shares of common stock and 980,430 shares
of common stock that represent the maximum aggregate number of shares
of common stock that may be issued upon conversion of notes and
preferred stock and upon exercise of warrants without waiver of
beneficial ownership limitations. If beneficial ownership limitations
had not been in effect, the selling security holder would have
beneficially owned a total of 3,051,533 shares of common stock, or
9.96% of our outstanding common stock, including 2,580,723 shares of
common stock underlying derivative securities, when calculated in
accordance with Rule 13d-3.
(8) Includes 470,810 outstanding shares of common stock, 448,438 shares of
common stock underlying the principal balance of, and estimated
interest on, a retained note, 400,000 shares of common stock underlying
an April 2002 warrant, 468,070 shares of common stock underlying the
principal balance of, and estimated interest on, an additional retained
note, 232,143 shares of common stock underlying an additional retained
warrant, 33,333 shares of common stock underlying a September 2003
bridge warrant, 897,633 shares of common stock underlying Series A
Preferred face amount and dividends, 178,575 shares of common stock
underlying an A-1 warrant and 178,575 shares of common stock underlying
an A-2 warrant.
(9) Includes 382,074 outstanding shares of common stock and 1,073,835
shares of common stock that represent the maximum aggregate number of
shares of common stock that may be issued upon conversion of notes and
preferred stock and upon exercise of warrants without waiver of
beneficial ownership limitations. If beneficial ownership limitations
had not been in effect, the selling security holder would have
beneficially owned a total of 2,480,159 shares of common stock, or
8.23% of our outstanding common stock, including 2,098,085 shares of
common stock underlying derivative securities, when calculated in
accordance with Rule 13d-3.
22
(10) Includes 382,074 outstanding shares of common stock, 166,563 shares of
common stock underlying the principal balance of, and estimated
interest on, a retained note, 216,033 shares of common stock underlying
the principal balance of, and estimated interest on, an additional
retained note, 107,143 shares of common stock underlying an additional
retained warrant, 50,000 shares of common stock underlying a September
2003 bridge warrant, 1,215,375 shares of common stock underlying Series
A Preferred face amount and dividends, 262,500 shares of common stock
underlying an A-1 warrant and 262,500 shares of common stock underlying
an A-2 warrant.
(11) Includes 20,028 outstanding shares of common stock, 36,006 shares of
common stock underlying the principal balance of, and estimated
interest on, an additional retained note, and 17,857 shares underlying
additional retained warrants.
(12) Includes 1,954,496 outstanding shares of common stock. Also includes
110,000 shares of common stock underlying a warrant held by William
Blair & Company, L.L.C., an NASD-member firm that has acted as
placement agent for us in a prior offering. Mr. Kiphart is manager -
corporate finance at William Blair & Company, L.L.C. If beneficial
ownership limitations had not been in effect, the selling security
holder would have beneficially owned a total of 13,949,262 shares of
common stock, or 34.83% of our outstanding common stock, including
11,994,766 shares of common stock underlying derivative securities,
when calculated in accordance with Rule 13d-3.
(13) Includes 1,954,496 outstanding shares of common stock, 1,601,563 shares
of common stock underlying the principal balance of, and estimated
interest on, a retained note, 1,273,800 shares of common stock
underlying an April 2002 warrant, 1,440,216 shares of common stock
underlying the principal balance of, and estimated interest on, an
additional retained note, 714,286 shares of common stock underlying an
additional retained warrant, 166,667 shares of common stock underlying
a September 2003 bridge warrant, 5,340,475 shares of common stock
underlying Series A Preferred face amount and dividends, 1,153,450
shares of common stock underlying an A-1 warrant and 1,153,450 shares
of common stock underlying an A-2 warrant.
(14) Includes 41,909 outstanding shares of common stock, 11,750 shares of
common stock underlying options, 268,388 shares of common stock
underlying the principal balance of, and estimated interest on, a
retained note, and 153,866 shares of common stock underlying an April
2002 warrant. Power to vote or dispose of the shares beneficially owned
by Nefilim Associates, LLC is held by Alexander T. Tennant as the
managing member.
(15) Includes 41,909 outstanding shares of common stock, 11,750 shares of
common stock underlying options, 328,569 shares of common stock
underlying the principal balance of, and estimated interest on, a
retained note, and 153,866 shares of common stock underlying an April
2002 warrant.
(16) Includes 40,857 outstanding shares of common stock, 150,000 shares of
common stock underlying an April 2002 warrant, 361,812 shares of common
stock underlying Series A Preferred face amount and dividends, 89,275
shares of common stock underlying an A-1 warrant and 89,275 shares of
common stock underlying an A-2 warrant.
(17) Includes 40,857 outstanding shares of common stock, 150,000 shares of
common stock underlying an April 2002 warrant, 413,350 shares of common
stock underlying Series A Preferred face amount and dividends, 89,275
shares of common stock underlying an A-1 warrant and 89,275 shares of
common stock underlying an A-2 warrant.
(18) Represents shares underlying a warrant. Power to vote or dispose of the
shares beneficially owned by William Blair & Company, L.L.C. is held by
the Executive Committee of William Blair & Company, L.L.C., which was
comprised of Edgar Janotta, E. David Coolidge, John Ettleson, James
McKinney, Albert Lacher, Carlette McMullan, Michelle Seitz, Robert
Newman and selling security holder Richard P. Kiphart.
(19) The power to vote or dispose of the shares beneficially owned by AMG
Financing Capital, Inc. is held by Arthur M. Gelber as president.
23
(20) Includes 103,787 outstanding shares of common stock and 70,841 shares
underlying options. Until June 2002, Mr. Gray was our vice president,
product development and embedded systems and chief technical officer.
He is now an hourly employee.
(21) Includes 82,413 outstanding shares of common stock and 70,841 shares of
common stock underlying options.
(22) Includes 506,597 shares of common stock underlying Series A Preferred
face amount and dividends, 125,000 shares of common stock underlying an
A-1 warrant and 125,000 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by Thomas Hackl and Konrad Ackerman as directors.
(23) Includes 578,750 shares of common stock underlying Series A Preferred
face amount and dividends, 125,000 shares of common stock underlying an
A-1 warrant and 125,000 shares of common stock underlying an A-2
warrant.
(24) Includes 101,319 shares of common stock underlying Series A Preferred
face amount and dividends, 25,000 shares of common stock underlying an
A-1 warrant and 25,000 shares of common stock underlying an A-2
warrant.
(25) Includes 115,750 shares of common stock underlying Series A Preferred
face amount and dividends, 25,000 shares of common stock underlying an
A-1 warrant and 25,000 shares of common stock underlying an A-2
warrant.
(26) Represents the maximum aggregate number of shares of common stock that
may be issued upon conversion of Series A Preferred face amount and
dividends and upon exercise of A-1 and A-2 warrants without waiver of
beneficial ownership limitations. If beneficial ownership limitations
had not been in effect, the selling security holder would have
beneficially owned a total of 2,592,253 shares of common stock, or
8.46% of our outstanding common stock, all of which were underlying
derivative securities, when calculated in accordance with Rule 13d-3.
(27) Includes 1,982,912 shares of common stock underlying Series A Preferred
face amount and dividends, 428,275 shares of common stock underlying an
A-1 warrant and 428,275 shares of common stock underlying an A-2
warrant.
(28) Includes 658,576 shares of common stock underlying Series A Preferred
face amount and dividends, 162,500 shares of common stock underlying an
A-1 warrant and 162,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by Paul Kessler as director and managing member of Bristol Capital
Advisors, LLC, the investment manager to Bristol Investment Fund, Ltd.
(29) Includes 752,375 shares of common stock underlying Series A Preferred
face amount and dividends, 162,500 shares of common stock underlying an
A-1 warrant and 162,500 shares of common stock underlying an A-2
warrant.
(30) Includes 151,979 shares of common stock underlying Series A Preferred
face amount and dividends, 37,500 shares of common stock underlying an
A-1 warrant and 37,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned by
Clarion Offshore Fund, Ltd. is held by Morton A. Cohen as investment
manager. Power to vote or dispose of the shares beneficially owned by
Clarion Partners, L.P. is held by Mr. Cohen as general partner.
(31) Includes 173,625 shares of common stock underlying Series A Preferred
face amount and dividends, 37,500 shares of common stock underlying an
A-1 warrant and 37,500 shares of common stock underlying an A-2
warrant.
(32) Includes 40,528 shares of common stock underlying Series A Preferred
face amount and dividends, 10,000 shares of common stock underlying an
A-1 warrant and 10,000 shares of common stock underlying an A-2
warrant.
(33) Includes 46,300 shares of common stock underlying Series A Preferred
face amount and dividends, 10,000 shares of common stock underlying an
A-1 warrant and 10,000 shares of common stock underlying an A-2
warrant.
24
(34) Includes 435,674 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by Wilheim Ungar as an officer.
(35) Includes 497,725 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant.
(36) Includes 435,674 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant. Gamma Capital Advisors, Ltd. (GCAL) is the general partner of
Gamma Opportunity Capital Partners, L.P. (GOCPL) and has the power to
vote or dispose of the shares being offered by GOCPL. As such, GCAL may
be deemed to beneficially own the shares being offered by GOCPL.
Christopher Rossman and Jonathan P. Knight, PhD, are the directors of
GCAL, each possessing the power to act on its behalf. GCAL, Mr. Rossman
and Dr. Knight each disclaim beneficial ownership of the shares being
offered by GOCPL.
(37) Includes 497,725 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant.
(38) Includes 101,319 shares of common stock underlying Series A Preferred
face amount and dividends, 25,000 shares of common stock underlying an
A-1 warrant and 25,000 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by Evan Schemenauer, Jonathan Walk and Don Dunston as directors.
(39) Includes 115,750 shares of common stock underlying Series A Preferred
face amount and dividends, 25,000 shares of common stock underlying an
A-1 warrant and 25,000 shares of common stock underlying an A-2
warrant.
(40) Includes 273,563 shares of common stock underlying Series A Preferred
face amount and dividends, 67,500 shares of common stock underlying an
A-1 warrant and 67,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by Frank E. Hart as general partner, David A. Rapaport as
executive vice president and general counsel and Fred A. Brasch as
chief financial officer.
(41) Includes 312,525 shares of common stock underlying Series A Preferred
face amount and dividends, 67,500 shares of common stock underlying an
A-1 warrant and 67,500 shares of common stock underlying an A-2
warrant.
(42) Includes 50,660 shares of common stock underlying Series A Preferred
face amount and dividends, 12,500 shares of common stock underlying an
A-1 warrant and 12,500 shares of common stock underlying an A-2
warrant.
(43) Includes 57,875 shares of common stock underlying Series A Preferred
face amount and dividends, 12,500 shares of common stock underlying an
A-1 warrant and 12,500 shares of common stock underlying an A-2
warrant.
(44) Includes 50,660 shares of common stock underlying Series A Preferred
face amount and dividends, 12,500 shares of common stock underlying an
A-1 warrant and 12,500 shares of common stock underlying an A-2
warrant. Mr. Gilbert is a broker at J Alexander, an NASD-member firm.
(45) Includes 57,875 shares of common stock underlying Series A Preferred
face amount and dividends, 12,500 shares of common stock underlying an
A-1 warrant and 12,500 shares of common stock underlying an A-2
warrant.
(46) Includes 30,396 shares of common stock underlying Series A Preferred
face amount and dividends, 7,500 shares of common stock underlying an
A-1 warrant and 7,500 shares of common stock underlying an A-2 warrant.
25
(47) Includes 34,725 shares of common stock underlying Series A Preferred
face amount and dividends, 7,500 shares of common stock underlying an
A-1 warrant and 7,500 shares of common stock underlying an A-2 warrant.
(48) Includes 50,660 shares of common stock underlying Series A Preferred
face amount and dividends, 12,500 shares of common stock underlying an
A-1 warrant and 12,500 shares of common stock underlying an A-2
warrant.
(49) Includes 57,875 shares of common stock underlying Series A Preferred
face amount and dividends, 12,500 shares of common stock underlying an
A-1 warrant and 12,500 shares of common stock underlying an A-2
warrant.
(50) Includes 222,903 shares of common stock underlying Series A Preferred
face amount and dividends, 55,000 shares of common stock underlying an
A-1 warrant and 55,000 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by Anthony L.M. Inder Rieden as president.
(51) Includes 254,650 shares of common stock underlying Series A Preferred
face amount and dividends, 55,000 shares of common stock underlying an
A-1 warrant and 55,000 shares of common stock underlying an A-2
warrant.
(52) Includes 40,528 shares of common stock underlying Series A Preferred
face amount and dividends, 10,000 shares of common stock underlying an
A-1 warrant and 10,000 shares of common stock underlying an A-2
warrant.
(53) Includes 46,300 shares of common stock underlying Series A Preferred
face amount and dividends, 10,000 shares of common stock underlying an
A-1 warrant and 10,000 shares of common stock underlying an A-2
warrant.
(54) Includes 40,528 shares of common stock underlying Series A Preferred
face amount and dividends, 10,000 shares of common stock underlying an
A-1 warrant, 10,000 shares of common stock underlying an A-2 warrant,
65,000 shares of common stock underlying placement agent warrants and
9,806 shares of common stock underlying exchange agent warrants. Mr.
Balk is an employee of Burnham Hill Partners.
(55) Includes 46,300 shares of common stock underlying Series A Preferred
face amount and dividends, 10,000 shares of common stock underlying an
A-1 warrant and 10,000 shares of common stock underlying an A-2
warrant.
(56) Includes 30,396 shares of common stock underlying Series A Preferred
face amount and dividends, 7,500 shares of common stock underlying an
A-1 warrant and 7,500 shares of common stock underlying an A-2 warrant.
Power to vote or dispose of the shares beneficially owned is held by
Stephen Schwartz as president.
(57) Includes 303,958 shares of common stock underlying Series A Preferred
face amount and dividends, 75,000 shares of common stock underlying an
A-1 warrant and 75,000 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by Mark Nordlicht, as managing member of Platinum Management (NY)
LLC, the general partner of Platinum Partners Value Arbitrage Fund LP.
(58) Includes 347,250 shares of common stock underlying Series A Preferred
face amount and dividends, 75,000 shares of common stock underlying an
A-1 warrant and 75,000 shares of common stock underlying an A-2
warrant.
(59) Includes 303,958 shares of common stock underlying Series A Preferred,
75,000 shares of common stock underlying an A-1 warrant and 75,000
shares of common stock underlying an A-2 warrant. Ramius Capital Group,
LLC is the investment advisor to Portside Growth and Opportunity Fund.
The managing member of Ramius Capital Group, LLC is C4S & Co., the
managing members of which are Peter Cohen, Morgan Stark, Thomas Strauss
and Jeffrey Solomon. As such, Messrs. Cohen, Stark, Strauss and Solomon
may be deemed beneficial ownership of the offered shares. However, each
individual disclaims beneficial ownership. Ramius Securities, LLC, an
NASD-member, is an affiliate of Ramius Capital Group, LLC. However,
Ramius Securities, LLC will not sell any offered shares and will not
receive compensation in connection with sales of offered shares.
26
(60) Includes 202,639 shares of common stock underlying Series A Preferred
face amount and dividends, 50,000 shares of common stock underlying an
A-1 warrant and 50,000 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by Howard Berger as manager.
(61) Includes 231,500 shares of common stock underlying Series A Preferred
face amount and dividends, 50,000 shares of common stock underlying an
A-1 warrant and 50,000 shares of common stock underlying an A-2
warrant.
(62) Represents the maximum aggregate number of shares of common stock that
may be issued upon conversion of Series A Preferred face amount and
dividends and upon exercise of A-1 and A-2 warrants without waiver of
beneficial ownership limitations. If beneficial ownership limitations
had not been in effect, the selling security holder would have
beneficially owned a total of 2,163,868 shares of common stock, or
7.16% of our outstanding common stock, all of which were underlying
derivative securities, when calculated in accordance with Rule 13d-3.
(63) Includes 1,655,225 shares of common stock underlying Series A Preferred
face amount and dividends, 357,500 shares of common stock underlying an
A-1 warrant and 357,500 shares of common stock underlying an A-2
warrant. RHP Master Fund, Ltd. (RMFL) is a party to an investment
management agreement with Rock Hill Investment Management, L.P.
(RHIML), a limited partnership of which the general partner is RHP
General Partner, LLC (RGPL). Pursuant to that agreement, RHIML directs
the voting and disposition of shares owned by RMFL. Messrs. Wayne
Bloch, Gary Kaminsky and Peter Lockhart own all of the interests in
RGPL but disclaim beneficial ownership of the shares offered by
RMFL.
(64) Includes 101,319 shares of common stock underlying Series A Preferred
face amount and dividends, 25,000 shares of common stock underlying an
A-1 warrant and 25,000 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by each of Riaz Ahmed Don and Raahim Don.
(65) Includes 70,924 shares of common stock underlying Series A Preferred
face amount and dividends, 17,500 shares of common stock underlying an
A-1 warrant and 17,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by Robert J. Neborsky as trustee.
(66) Includes 81,025 shares of common stock underlying Series A Preferred
face amount and dividends, 17,500 shares of common stock underlying an
A-1 warrant and 17,500 shares of common stock underlying an A-2
warrant.
(67) Represents the maximum aggregate number of shares of common stock that
may be issued upon conversion of Series A Preferred face amount and
dividends and upon exercise of A-1 and A-2 warrants without waiver of
beneficial ownership limitations. If beneficial ownership limitations
had not been in effect, the selling security holder would have
beneficially owned a total of 4,625,704 shares of common stock, or
14.16% of our outstanding common stock, all of which were underlying
derivative securities (including 2,033,451 shares underlying derivative
securities held by selling security holder SDS Merchant Fund, L.P.),
when calculated in accordance with Rule 13d-3.
(68) Includes 1,982,913 shares of common stock underlying Series A Preferred
face amount and dividends, 428,275 shares of common stock underlying an
A-1 warrant and 428,275 shares of common stock underlying an A-2
warrant.
(69) Includes 435,674 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by each of Elizabeth Leonard as chief operating officer and
Michael Finklestein as president.
27
(70) Includes 497,725 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant.
(71) Includes 435,674 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares is held by Joshua
Silverman as partner. Mr. Silverman disclaims beneficial ownership of
the shares held by Vertical Ventures, LLC.
(72) Includes 70,924 shares of common stock underlying Series A Preferred
face amount and dividends, 17,500 shares of common stock underlying an
A-1 warrant and 17,500 shares of common stock underlying an A-2
warrant. Also includes 105,924 shares of common stock underlying
derivative securities held by selling security holder West End
Convertible Fund L.P. Power to vote or dispose of the shares
beneficially owned is held by each of Ethan Benovitz, Daniel Saks and
Jaime Hartman as managing members.
(73) Includes 81,025 shares of common stock underlying Series A Preferred
face amount and dividends, 17,500 shares of common stock underlying an
A-1 warrant and 17,500 shares of common stock underlying an A-2
warrant.
(74) Includes 70,924 shares of common stock underlying Series A Preferred
face amount and dividends, 17,500 shares of common stock underlying an
A-1 warrant and 17,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by each of Ethan Benovitz, Daniel Saks and Jaime Hartman, as
managing members of WEC Partners, LLC, which is the general partner of
West End Convertible Fund L.P.
(75) Includes 101,319 shares of common stock underlying Series A Preferred
face amount and dividends, 25,000 shares of common stock underlying an
A-1 warrant and 25,000 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by each of Evan Schemenauer, Jennifer Kelly and Arthur Jones as
directors.
(76) Includes 395,146 shares of common stock underlying Series A Preferred
face amount and dividends, 97,500 shares of common stock underlying an
A-1 warrant and 97,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares beneficially owned is
held by J. David Hassan as director.
(77) Includes 451,425 shares of common stock underlying Series A Preferred
face amount and dividends, 97,500 shares of common stock underlying an
A-1 warrant and 97,500 shares of common stock underlying an A-2
warrant.
(78) Includes 435,674 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant. As investment manager under a management agreement, Castle
Creek Partners, LLC may exercise dispositive and voting power over the
shares offered by Castle Creek Technology Partners LLC. Daniel Asher is
the managing member of Castle Creek Partners, LLC. Castle Creek
Partners, LLC and Mr. Asher disclaim beneficial ownership of the shares
owned by Castle Creek Technology Partners, LLC.
(79) Includes 497,725 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant.
(80) Includes 435,674 shares of common stock underlying Series A Preferred
face amount and dividends, 107,500 shares of common stock underlying an
A-1 warrant and 107,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares is held by Michael A.
Roth and Brian J. Stark, who are the founding members and direct the
management of Staro Asset Management L.L.C., which entity acts as
investment manager and has sole power to direct the management of SF
Capital Partners Ltd. SF Capital Partners Ltd. is affiliated with two
NASD-member firms.
28
(81) Includes 20,264 shares of common stock underlying Series A Preferred
face amount and dividends, 5,000 shares of common stock underlying an
A-1 warrant and 5,000 shares of common stock underlying an A-2 warrant.
(82) Includes 23,150 shares of common stock underlying Series A Preferred
face amount and dividends, 5,000 shares of common stock underlying an
A-1 warrant and 5,000 shares of common stock underlying an A-2 warrant.
(83) Includes 20,264 shares of common stock underlying Series A Preferred
face amount and dividends, 5,000 shares of common stock underlying an
A-1 warrant and 5,000 shares of common stock underlying an A-2 warrant.
Power to vote or dispose of the shares is held by Alan E. Ennis as
owner.
(84) Includes 121,583 shares of common stock underlying Series A Preferred
face amount and dividends, 30,000 shares of common stock underlying an
A-1 warrant and 30,000 shares of common stock underlying an A-2
warrant.
(85) Includes 138,900 shares of common stock underlying Series A Preferred
face amount and dividends, 30,000 shares of common stock underlying an
A-1 warrant and 30,000 shares of common stock underlying an A-2
warrant.
(86) Includes 60,792 shares of common stock underlying Series A Preferred
face amount and dividends, 15,000 shares of common stock underlying an
A-1 warrant and 15,000 shares of common stock underlying an A-2
warrant.
(87) Includes 69,450 shares of common stock underlying Series A Preferred
face amount and dividends, 15,000 shares of common stock underlying an
A-1 warrant and 15,000 shares of common stock underlying an A-2
warrant.
(88) Includes 30,396 shares of common stock underlying Series A Preferred
face amount and dividends, 7,500 shares of common stock underlying an
A-1 warrant and 7,500 shares of common stock underlying an A-2 warrant.
Power to vote or dispose of the shares beneficially owned is held by
each of Roger Lockhart and Divina Lockhart as trustees. Mr. Lockhart is
employed by ViewTrade Financial.
(89) Includes 101,319 shares of common stock underlying Series A Preferred
face amount and dividends, 25,000 shares of common stock underlying an
A-1 warrant and 25,000 shares of common stock underlying an A-2
warrant.
(90) Includes 233,035 shares of common stock underlying Series A Preferred
face amount and dividends, 57,500 shares of common stock underlying an
A-1 warrant and 57,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares is held by Myles S.
Jerdan as president.
(91) Includes 266,225 shares of common stock underlying Series A Preferred
face amount and dividends, 57,500 shares of common stock underlying an
A-1 warrant and 57,500 shares of common stock underlying an A-2
warrant.
(92) Includes 70,924 shares of common stock underlying Series A Preferred
face amount and dividends, 17,500 shares of common stock underlying an
A-1 warrant and 17,500 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares is held by Philip R.
Clark as owner.
(93) Includes 40,528 shares of common stock underlying Series A Preferred
face amount and dividends, 10,000 shares of common stock underlying an
A-1 warrant and 10,000 shares of common stock underlying an A-2
warrant. Mr. Gebhardt is a member of the American Stock Exchange.
(94) Includes 111,451 shares of common stock underlying Series A Preferred
face amount and dividends, 27,500 shares of common stock underlying an
A-1 warrant and 27,500 shares of common stock underlying an A-2
warrant.
(95) Includes 127,325 shares of common stock underlying Series A Preferred
face amount and dividends, 27,500 shares of common stock underlying an
A-1 warrant and 27,500 shares of common stock underlying an A-2
warrant.
29
(96) Includes 40,528 shares of common stock underlying Series A Preferred
face amount and dividends, 10,000 shares of common stock underlying an
A-1 warrant and 10,000 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares is held by Mr. Jacobson
as partner.
(97) Includes 30,396 shares of common stock underlying Series A Preferred
face amount and dividends, 7,500 shares of common stock underlying an
A-1 warrant and 7,500 shares of common stock underlying an A-2 warrant.
Mr. McCandless is affiliated with a registered broker-dealer.
(98) Includes 30,396 shares of common stock underlying Series A Preferred
face amount and dividends, 7,500 shares of common stock underlying an
A-1 warrant and 7,500 shares of common stock underlying an A-2 warrant.
Also includes 50,720 shares of common stock underlying derivative
securities held by selling security holder Hudson Valley Capital
Management, LLC Mr. Doller is an associate of Kimball & Cross.
(99) Includes 34,725 shares of common stock underlying Series A Preferred
face amount and dividends, 7,500 shares of common stock underlying an
A-1 warrant and 7,500 shares of common stock underlying an A-2 warrant.
(100) Includes 40,528 shares of common stock underlying Series A Preferred
face amount and dividends, 10,000 shares of common stock underlying an
A-1 warrant and 10,000 shares of common stock underlying an A-2
warrant. Power to vote or dispose of the shares is held by Julius Roma
as owner.
(101) Represents the maximum aggregate number of shares of common stock that
may be issued upon conversion of Series A Preferred face amount and
dividends and upon exercise of A-1 and A-2 warrants without waiver of
beneficial ownership limitations. If beneficial ownership limitations
had not been in effect, the selling security holder would have
beneficially owned a total of 2,033,451 shares of common stock, or
6.76% of our outstanding common stock, all of which were underlying
derivative securities, when calculated in accordance with Rule 13d-3.
(102) Includes 1,364,225 shares of common stock underlying Series A Preferred
face amount and dividends, 294,650 shares of common stock underlying an
A-1 warrant and 294,650 shares of common stock underlying an A-2
warrant.
(103) Voting and dispositive power is held by Kris and Geraldine Shah as
trustees. Mr. Shah is our co-chairman, president, chief operating
officer and secretary.
(104) JAW Financial, L.P. shares voting and dispositive power over these
shares with JAW Lending, Inc., the general partner of JAW Financial,
L.P., and Marvin J. Winkler, an executive officer and 50% shareholder
of JAW Lending, Inc. Mr. Winkler is our co-chairman and chief executive
officer.
(105) Represents shares of common stock underlying a warrant. Power to vote
or dispose of the shares is held by Steven R. Chamberlain as chairman,
Gary A. Prince as director of mergers and acquisitions and Elaine M.
Parfitt as executive vice president and chief financial officer.
(106) Power to vote or dispose of the shares beneficially owned by Research
Venture, LLC is held by Jack J. Kessler, as managing member, and
Jeffrey Soffer, as member.
(107) Represents shares of common stock underlying a warrant.
(108) Represents shares of common stock underlying a warrant. Power to vote
or dispose of the shares is held by Gordon Roth as chief financial
officer and chief operating officer.
(109) Power to vote or dispose of the shares is held by Gerard T. Feeney as
chief financial officer and Steven Sprague as chief executive officer.
(110) Includes 800,000 shares of common stock underlying placement agent
warrants and 163,000 shares of common stock underlying exchange agent
warrants. Power to vote or dispose of the shares is held by Cass
Gunther Adelman, Esq., as managing member of Burnham Hill Holdings,
LLC. Ms. Adelman's spouse, Jason Adelman, is a managing director of BHP
and is a member of Burnham Hill Holdings, LLC.
(111) Includes 49,204 shares of common stock underlying placement agent
warrants and 9,599 shares of common stock underlying exchange agent
warrants. Ms. Bergman is chief operating officer of Pali Capital, Inc.
(112) Includes 49,204 shares of common stock underlying placement agent
warrants and 9,599 shares of common stock underlying exchange agent
warrants. Mr. Reifler is chief executive officer of Pali Capital, Inc.
30
(113) Includes 20,681 shares of common stock underlying placement agent
warrants. Mr. Singer is an employee of BHP.
(114) Includes 5,830 shares of common stock underlying placement agent
warrants. Power to vote or dispose of the shares is held by John
Clifford as chief financial officer.
(115) Includes 50,720 shares of common stock underlying placement agent
warrants. Hudson Valley Capital Management, LLC is an affiliate of
Kimball & Cross. Power to vote or dispose of the shares beneficially
owned is held by Charles W. Doller, III as managing member. Mr. Doller
is an employee of Hudson Valley Capital Management LLC, and he operates
a branch office of a registered broker-dealer.
(116) Includes 1,750 shares of common stock underlying placement agent
warrants. Mr. Shufeldt is employed by Kimball & Cross.
(117) Includes 27,040 shares of common stock underlying placement agent
warrants. Mr. Herman is employed by ViewTrade Financial.
(118) Includes 7,600 shares of common stock underlying placement agent
warrants. Mr. Callahan is employed by ViewTrade Financial.
(119) Includes 12,960 shares of common stock underlying placement agent
warrants. Mr. Ford is employed by ViewTrade Financial.
(120) Includes 900 shares of common stock underlying placement agent
warrants. Mr. Pietro is employed by ViewTrade Financial.
(121) Includes 4,000 shares of common stock underlying placement agent
warrants. Mr. Ware is employed by ViewTrade Financial.
(122) Includes 6,000 shares of common stock underlying placement agent
warrants. Mr. St. Clair is employed by ViewTrade Financial.
(123) Includes 1,500 shares of common stock underlying placement agent
warrants. Also includes 45,396 shares of common stock underlying
derivative securities held by selling security holder Roger & Divina
Lockhart C.R.U.T. Mr. Lockhart is employed by ViewTrade Financial.
31
PRIVATE PLACEMENTS THROUGH WHICH THE SELLING SECURITY HOLDERS OBTAINED
BENEFICIAL OWNERSHIP OF THE OFFERED SHARES
All of the shares of common stock being offered under this prospectus
were issued, or are issuable upon exercise or conversion of derivative
securities that were issued, in the below-described private placement
transactions.
RESTRUCTURING ARRANGEMENT AND SETTLEMENTS WITH RESEARCH VENTURE, LLC
Research Venture, LLC filed a complaint against us on June 4, 2002, and
filed first amended complaints against us on August 6 and August 7, 2002,
alleging unlawful detainer and seeking possession of two leased properties,
alleged damages and lost rent. We surrendered possession of both properties and
negotiated a restructuring of our obligations under the leases. The
restructuring involved, among other terms, our entry on October 23, 2002, into a
stipulation for entry of judgment that permitted Research Venture to obtain a
judgment against us in the maximum aggregate amount of $3.1 million, less
consideration we paid prior to any entry of the judgment, if we did not comply
with the terms of the restructuring arrangement through December 2004.
Under the restructuring arrangement, one of the leases was cancelled
and we agreed to take occupancy of the other leased building under a seven-year
operating lease beginning in December 2002. In addition, we agreed to make cash
payments to Research Venture aggregating $500,000, and we issued 959,323 shares
of common stock ("October 2002 settlement shares") and a subordinated
convertible promissory note in the principal amount of $360,000 that was
convertible at our option, with certain exceptions, into shares of our common
stock at a conversion price equal to the greater of $1.30 per share or the
arithmetic mean of the closing sale prices of a share of our common stock for
the 30-day period ending on the fifth day prior to the date upon which we
transmitted a conversion notice to Research Venture.
On September 16, 2003, we registered for resale the 959,323 October
2002 settlement shares and an additional 276,923 shares of common stock that
were issued or issuable upon conversion of the subordinated convertible
promissory note. The principal amount of the note represented prepaid rent on
the property we were leasing from Research Venture. Exceptions to our right to
convert the principal amount of the note into shares of common stock included
the occurrence of a change of control of our company, as defined in the note,
our failure to comply with our registration obligations under the settlement, or
entry of the stipulated judgment.
Research Venture was entitled to entry of the stipulated judgment if we
failed to comply with the terms of the restructuring arrangement. Immediately
prior to any entry of the stipulated judgment, Research Venture had the right to
return to us any or all shares of common stock we issued under the settlement,
and we were to receive a credit against the judgment amount equal to $1.30
multiplied by the number of shares of common stock not returned to us.
We did not timely tender the full cash payments that were due under the
restructuring agreement. As a result, on August 11, 2003, Research Venture
obtained entry of the stipulated judgment in the amount of $2.7 million.
On August 29, 2003, we entered into an agreement of settlement on
stipulated judgment with Research Venture. Under that settlement agreement,
Research Venture retained the 959,323 October 2002 settlement shares and 96,919
shares of common stock that had been issued upon conversion of the note ("RV
conversion shares"), and we registered all of those shares for resale by
Research Venture under a prospectus with which this prospectus has been
combined. In addition, Research Venture canceled and surrendered the remaining
balance of the note, we paid to Research Venture cash in the amount of $865,000
and issued to Research Venture 414,450 shares of common stock ("August 2003
settlement shares") that were required to be registered for resale by Research
Venture under this prospectus, and the building lease agreement was terminated.
The settlement agreement contained mutual general release language, and Research
Venture authorized us to obtain entry of a stipulation to vacate the August 11,
2003 stipulated judgment.
32
Research Venture and we also entered into an amended stipulation for
entry of judgment on August 29, 2003. The amended stipulation provides that if
we do not maintain effectiveness of the registration statement covering the
October 2002 settlement shares and RV conversion shares, then Research Venture
will have the right to obtain entry against us of a stipulated judgment in the
amount of $1.7 million less the product of $1.30 multiplied by the number of
those shares that Research Venture sells prior to entry of the stipulated
judgment. Also, because we did not timely obtain effectiveness of the
registration statement of which this prospectus is a part (and if we do not
maintain effectiveness of the registration statement of which this prospectus is
a part), Research Venture is entitled to obtain entry against us of a stipulated
judgment in the amount of $373,000 less the product of $0.90 multiplied by the
number of the additional 414,450 shares of common stock that Research Venture
sells prior to entry of the stipulated judgment. If the stipulated judgment is
entered, any unsold shares will be returned to us for cancellation.
We have included for resale under this prospectus:
o 52,500 October 2002 settlement shares and RV conversion shares
that remain unsold; and
o 414,450 August 2003 settlement shares.
SETTLEMENT AND FORBEARANCE AGREEMENT WITH INTEGRAL SYSTEMS, INC.
In May 2002, Integral Systems, Inc. filed an action against us in the
Circuit Court for Montgomery County, Maryland, Case No. 232706, alleging that we
breached the terms of a promissory note for the payment of $390,000. Integral
Systems then obtained a confessed judgment against us for approximately
$327,000. In March 2003, we executed settlement papers that would permit
Integral Systems to file a stipulated judgment against us in the amount of the
unpaid balance if we defaulted on a payment schedule that required us to make
payments of $20,000 per month until the balance was paid in full. As an agreed
upon amount was not paid in full by June 30, 2003, we deposited 400,000 common
shares into a third party escrow in July 2003. In November 2003, we paid the
obligation in full. The 400,000 shares deposited into the third party escrow
were returned for cancellation in accordance with the terms of the escrow
agreement. In March 2003, we also issued a warrant to purchase up to 150,000
shares of common stock at an exercise price of $1.30 per share as part of the
settlement. The warrant has a three-year term and contains customary
anti-dilution provisions for stock splits, stock dividends and the like. The
warrant also contains a "net exercise" cashless exercise feature that will
permit the warrant to be exercised for a "net" number of shares using the spread
between the fair market value at the time of exercise and the warrant exercise
price as payment for a reduced number of common shares. We have included for
resale under this prospectus the 150,000 shares of common stock underlying the
warrant.
33
INVESTMENT BANKING EXPENSES FOR RBC DAIN RAUSCHER, INC. AND MESSRS. BURKE,
BURTT AND HANNAN
Under a letter agreement dated May 31, 2001, as amended on October 31,
2001, between us, BIZ Interactive Zone, Inc. ("BIZ") and Tucker Anthony Sutro
Capital Markets, then an NASD-member firm, in lieu of the $25,000 retainer and
approximately $11,000 in unreimbursed expenses that we owed to Tucker Anthony
Sutro Capital Markets for investment banking services, we issued 4,050 shares of
common stock to RBC Dain Rauscher, Inc. (formerly Dain Rauscher Incorporated),
as successor by merger to Tucker Anthony Sutro Capital Markets, and an aggregate
of 4,050 shares of common stock to Douglas J. Burke, Forbes W. Burtt and William
M. Hannan, three then employees of Tucker Anthony Sutro Capital Markets. We have
included for resale under this prospectus the 8,100 shares of common stock
issued under that agreement.
INDEPENDENT CONTRACTOR OPTIONS FOR NEFILIM ASSOCIATES, LLC
Between December 5, 2001 and May 23, 2002, we were a party to an
Independent Contractor Services Agreement with Nefilim Associates, LLC. As of
the effective date of the agreement, we granted to Nefilim Associates, LLC a
two-year fully-vested non-qualified option to purchase up to an aggregate of
6,250 shares of common stock at an exercise price of $4.05 per share, which was
the last sale price of a share of our common stock on the immediately preceding
day. As of March 4, 2002, we granted to Nefilim Associates, LLC a two-year
fully-vested non-qualified option to purchase up to 6,250 shares of common stock
at an exercise price of $2.61 per share, which was 90% of the average of the
closing prices of a share of our common stock for the 20-trading day period
ending on the day immediately preceding the grant date of the option. As of
April 16, 2002, we granted to Nefilim Associates, LLC a two-year fully-vested
non-qualified option to purchase up to 5,500 shares of common stock at an
exercise price of $2.15 per share, which was 90% of the average of the closing
prices of a share of our common stock for the 20-trading day period ending on
the day immediately preceding the grant date of the option. The December 3, 2001
option has expired. We have included for resale under this prospectus the 11,750
shares of common stock underlying the two un-expired options.
PLACEMENT AGENT WARRANT FOR WILLIAM BLAIR & COMPANY, L.L.C.
On May 2, 2002, we granted to William Blair & Company, L.L.C. a
three-year warrant to purchase up to 110,000 shares of common stock at an
initial exercise price of $1.00 per share as compensation for placement agent
services rendered in connection with our December 2001 and April 2002
financings. The warrant contains a net exercise cashless exercise provision. We
have included for resale under this prospectus the 110,000 shares of common
stock underlying the warrant.
FINDERS' FEE FOR AMG FINANCING CAPITAL, INC.
Under a finders' fee agreement dated April 2, 2002, JAW Financial,
L.P., a limited partnership affiliated with Marvin J. Winkler, our co-chairman
of the board and chief executive officer, transferred to AMG Financing Capital,
Inc. 12,500 shares of common stock owned by JAW Financial, L.P. as partial
payment for the engagement fee we owed to AMG Financing Capital, Inc. We have
included the 12,500 shares of common stock for resale under this prospectus.
PATENT ASSIGNMENT BY ROBERT J. GRAY
In lieu of payment of $28,000 in cash compensation that we owed to
Robert J. Gray in consideration for patents he assigned to us under the terms of
his employment arrangement with us, we issued to Mr. Gray effective as of June
13, 2002 an aggregate of 21,374 shares of common stock. We have included those
shares of common stock for resale under this prospectus.
TERMINATION AGREEMENT AND MUTUAL RELEASE WITH WAVE SYSTEMS CORP.
As of September 30, 2002, we executed a Termination Agreement and
Mutual Release by and among us, BIZ and Wave Systems Corp ("Wave"). The
Termination Agreement documented the mutual termination effective as of August
31, 2002, of a Purchase, Development and Deployment Agreement, or the Wave
Agreement, between BIZ and Wave dated October 2, 2000, as amended on May 10,
2001.
34
Under the Wave Agreement, Wave was to provide development work in
exchange for cash payments by BIZ of $278,000 per month from June 1, 2001, to
December 1, 2002. If BIZ did not make the required monthly payments, then Wave
had the right to issue to BIZ default notices requesting payment in the form of
common stock of BIZ. If the default notices were not cured within 30 days of
written notice, then the unpaid installment would convert from a cash obligation
into a stock acquisition right, or SAR. The SAR would give Wave the right to
acquire a number of fully paid, nonassessable shares of common stock determined
by dividing the fair market value (the average closing price of a share of
common stock for the ten trading-day period prior to the date of exercise) of a
share of common stock on the date of exercise of the SAR into the aggregate
portion of the installment payments that were the subject of an uncured default.
The Wave Agreement provided that in the event of a merger or combination
involving BIZ, the shares to be issued upon exercise of the SARs would be the
shares of BIZ's successor in interest. In August 2001, BIZ became a wholly-owned
subsidiary of ours through a merger transaction. Consequently, shares of our
common stock became issuable under the SARs.
Under the Termination Agreement, the Wave Agreement was terminated as
of August 31, 2002, and we issued to Wave a non-negotiable, non-interest
bearing, subordinated convertible promissory note due December 31, 2005, in the
principal amount of $270,000 and 1,600,000 shares of common stock ("Wave
termination shares"). The conversion rate of the note initially was $1.35 and
was subject to adjustments for stock splits, stock dividends, reclassifications,
reorganizations and the like. On December 13, 2002, we converted the entire
principal balance of the note into 200,000 shares of common stock ("Wave
conversion shares") at the initial conversion rate of $1.35.
We have included for resale under this prospectus:
o 1,600,000 Wave termination shares ; and
o 200,000 Wave conversion shares.
IPO WARRANTS FOR PACIFIC CREST SECURITIES, INC. AND BLUESTONE PARTNERS,
L.P.
Warrants to purchase 370,000 shares of common stock at $18.15 per share
were issued to underwriters, Pacific Crest Securities, Inc. and BlueStone
Partners, L.P., as part of our initial public offering of common stock. The
warrants are exercisable at any time, in whole or in part, during the four-year
period commencing on June 9, 2000. The warrant contains a net exercise cashless
exercise provision.
ADVISORY SERVICES WARRANT TO ROTH CAPITAL PARTNERS, LLC
A warrant to purchase 23,756 shares of common stock at $2.11 per share
was issued by BIZ to Roth Capital Partners, Inc. for financial advisory services
prior to our acquisition of BIZ in August 2001. Roth Capital Partners, Inc.
subsequently reorganized, and the warrant is now held by Roth Capital Partners,
LLC. The warrant is exercisable for shares of our common stock at any time, in
whole or in part, during the five-year period commencing on July 31, 2000. The
warrant contains a net exercise cashless exercise provision.
35
APRIL 2002 INTEREST SHARES, APRIL 2002 WARRANTS, RETAINED NOTES,
ADDITIONAL RETAINED NOTES, ADDITIONAL RETAINED WARRANTS AND SEPTEMBER 2003
CASH EXERCISE SHARES
Under a Securities Purchase, Registration Rights and Security Agreement
dated as of April 16, 2002, we issued to six accredited investors in a private
offering $5,791,111 in principal amount of 10% secured convertible promissory
notes due December 31, 2005 ("April 2002 notes"). The investors were Richard P.
Kiphart ($3,789,667), Nefilim Associates, LLC ($256,444), Crestview Capital
Fund, L.P. ($1,075,000), Crestview Capital Fund II, L.P. ($400,000), Crestview
Offshore Fund, Inc. ($25,000) and Robert Geras ($250,000).
The April 2002 notes had an initial conversion price of $1.00 per
share. Interest on the April 2002 notes was payable quarterly in cash or, at our
option, in shares of common stock valued at the arithmetic mean of the closing
sale price of our common stock for the 30-day period ending on the day prior to
the day the interest payment is due. The outstanding principal balances of the
April 2002 notes and, at our option, any accrued and unpaid interest,
automatically were to convert into shares of common stock if at any time after
the declaration of effectiveness of the registration statement covering the
resale of the underlying shares of common stock the closing sale price of a
share of our common stock equaled or exceeded $3.00 for 20 consecutive trading
days, the average daily trading volume during the 20-trading day period equaled
or exceeded 100,000 shares, and the registration statement remained effective
throughout each day of the 20-trading day period.
Mr. Kiphart, Crestview Capital Fund, L.P., and Crestview Capital Fund
II, L.P. made various bridge loans to us between November 2002 and September
2003. In November 2003, we completed a private placement ("Series A financing")
of Series A Preferred Stock that were accompanied by A-1 and A-2 warrants, as
described below. Mr. Kiphart, Crestview Capital Fund, L.P., Crestview Capital
Fund II, L.P. and Mr. Geras exchanged $1,539,667, $400,000, $120,000 and
$250,000, respectively, of their April 2002 notes for an aggregate of 329.95
shares of Series A Preferred and A-1 and A-2 warrants to purchase an aggregate
of 1,649,762 shares of common stock.
An aggregate of $1,986,444 in principal amount of April 2002 notes
("retained notes") were retained by Mr. Kiphart ($1,250,000), Nefilim
Associates, LLC ($256,444), Crestview Capital Fund, L.P. ($350,000) and
Crestview Capital Fund II, L.P. ($130,000). THE retained notes have a maturity
date of December 31, 2005 and are secured by a security interest in all of our
assets.
April 2002 notes held by Mr. Kiphart, Crestview Capital Fund, L.P.,
Crestview Capital Fund II, L.P. and Crestview Offshore Fund, Inc. in the
principal amounts of $1,000,000, $325,000, $150,000 and $25,000, respectively,
were exchanged for new notes ("additional retained notes") that had terms
substantially identical to the terms of the April 2002 notes except that,
automatically upon approval at our 2003 annual meeting of stockholders, the
additional retained notes will convert into shares of common stock at a
conversion price of $0.70 per common share. The additional retained notes were
accompanied by additional retained warrants to purchase up to 1,071,429 shares
of common stock. The additional retained warrants are substantially identical to
the A-1 warrants except that their initial exercise price is $1.00 per common
share.
The April 2002 notes were accompanied by three-year warrants ("April
2002 warrants") to purchase an aggregate of 3,477,666 shares of common stock.
The April 2002 warrants had an initial exercise price of $1.30 per share and
contain a net exercise cashless exercise provision and customary anti-dilution
provisions for stock splits, stock dividends and the like. We repriced the April
2002 warrants in two traunches.
In September 2003, April 2002 warrants to purchase up to 1,500,000
shares of common stock ("September 2003 cash exercise shares") were repriced to
a per share exercise price of $0.50 and then immediately exercised in exchange
for the cancellation of $750,000 in bridge notes held by Mr. Kiphart and
Crestview Capital Fund, L.P., Crestview Capital Fund II, L.P. and Crestview
Offshore Fund, Inc. In September 2003, we also repriced the remaining April 2002
warrants to purchase up to 1,977,666 shares of common stock held by Mr. Kiphart,
Crestview Capital Fund L.P., Mr. Geras and Nefilim Associates, LLC to exercise
price of the A-1 warrants.
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We have included for resale under this prospectus:
o 947,279 shares of common stock issued upon conversion of interest
on the retained notes through October 1, 2003 ("April 2002
interest shares");
o 1,977,666 shares of common stock underlying April 2002 warrants;
o 2,545,133 shares of common stock underlying the principal balances
of, and estimated interest (at an assumed interest conversion
price of $0.80 per share) from October 1, 2003 through December
31, 2005 on, the retained notes;
o 2,160,325 shares of common stock underlying the principal balances
of, and estimated interest (at an assumed interest conversion
price of $0.80 per share) from October 1, 2003 through December
23, 2003 on, the additional retained notes;
o 1,071,429 shares of common stock underlying additional retained
warrants; and
o 1,500,000 September 2003 cash exercise shares.
SEPTEMBER 2003 BRIDGE WARRANTS, PENALTY SHARES, SEPTEMBER 2003 CASHLESS
EXERCISE SHARES, AND MARCH 2003 CASHLESS EXERCISE SHARES
On August 27, 2003, we issued to Richard P. Kiphart and Crestview
Capital Fund II, L.P. three 10% promissory notes totaling $1,250,000. Two of
those notes totaling $750,000 were cancelled in exchange for the issuance of the
September 2003 cash exercise shares. The remaining $500,000 note held by Mr.
Kiphart was to convert into securities to be issued in the Series A financing.
However, that note was first exchanged for a new note issued in a September 2003
bridge financing under a Bridge Loan Agreement dated September 1, 2003 between
and among us and Mr. Kiphart, Crestview Capital Fund, L.P., Crestview Capital
Fund II, L.P., Crestview Offshore Fund, Inc. and SDS Merchant Fund, L.P.
In the September 2003 bridge financing, we issued to Mr. Kiphart,
Crestview Capital Fund II, L.P. and SDS Merchant Fund, L.P. 10% convertible
promissory notes in the aggregate principal amount $1,500,000 ("September 2003
bridge notes") in exchange for $1,000,000 cash and the cancellation of Mr.
Kiphart's $500,000 note dated August 27, 2003. The September 2003 bridge
investors received five-year bridge warrants ("September 2003 bridge warrants")
to purchase up to an aggregate of 500,000 shares of common stock on
substantially the same terms as the A-1 warrants. The September 2003 bridge
notes were due on demand after November 30, 2003 and automatically were
reinvested in the Series A financing at an assumed value of 110% of their then
outstanding balance of principal plus interest.
Under a Forbearance Agreement dated September 1, 2003, Mr. Kiphart,
Crestview Capital Fund, L.P., Crestview Capital Fund II, L.P. and Crestview
Offshore Fund, Inc., Nefilim Associates, LLC and Mr. Geras agreed to refrain
from taking any action under their April 2002 notes and related documents in
exchange for the issuance of an aggregate of 200,000 shares of common stock
("penalty shares") to Mr. Kiphart and the three Crestview entities.
In conjunction with the September 2003 bridge financing, we repriced
warrants to purchase up to 2,055,000 shares of common stock, which warrants had
per share exercise prices ranging from $0.60 to $1.30, to a new exercise price
of $0.50 per share. The repriced warrants included the warrants that were
exercised in exchange for the 1,500,000 September 2003 cash exercise shares. The
remaining repriced warrants to purchase up to 555,000 shares of common stock,
which warrants had been issued to Crestview Capital Fund, L.P. (20,000),
Crestview Capital Fund II, L.P. (130,000) and Mr. Kiphart (405,000) in previous
bridge financings, were exercised on a net exercise cashless basis in exchange
for the issuance of 262,895 shares of common stock ("September 2003 cashless
exercise shares").
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Also following the closing of the Series A financing, we repaid 18%
bridge notes in the aggregate principal amount of $40,000 that our co-chairmen,
Kris Shah (through the Kris and Geraldine Shah Family Trust) and Marvin J.
Winkler, had purchased from us in a bridge financing on March 28, 2003 and that
had matured on July 26, 2003. Messrs. Shah and Winkler waived all penalties and
costs related to their bridge notes and their related bridge warrants to
purchase up to 40,000 shares of common stock. The bridge warrants were to have a
per share exercise price equal to the greater of $0.70 or the conversion price
of securities we had considered issuing in a financing, but not to exceed $1.30.
In conjunction with the waiver of penalties and costs, on October 21, 2003, the
per share exercise price of their bridge warrants was set at $0.50 (to be
consistent with the exercise price of the warrants that were exercised in
exchange for September 2003 cashless exercise shares), and Messrs. Winkler and
Shah exercised the bridge warrants on a cashless basis in exchange for an
aggregate of 9,474 shares of common stock ("March 2003 cashless exercise
shares"). Mr. Winkler then transferred his 2,369 March 2003 cashless exercise
shares to JAW Financial, L.P., a limited partnership of which JAW Lending, Inc.
is the general partner.
We have included for resale under this prospectus:
o 500,000 shares of common stock underlying September 2003 bridge
warrants;
o 200,000 penalty shares;
o 262,895 September 2003 cashless exercise shares; and
o 9,474 March 2003 cashless exercise shares.
SERIES A CONVERTIBLE PREFERRED STOCK AND A-1 AND A-2 WARRANTS
On November 19, 2003, we issued 2,150 shares of Series A Preferred to
84 accredited investors in exchange for $9,510,333 in cash and $5,539,667 in
cancellation of previously issued promissory notes. The rights, preferences and
privileges of the Series A Preferred are described below. Each investor in the
Series A financing received one five-year A-1 warrant to purchase 2,500 shares
of common stock and one five-year A-2 warrant to purchase 2,500 shares of common
stock for each share of Series A Preferred the investor purchased. The A-1
warrants have an initial exercise price of $1.25 per share, which increases to
$1.50 six months and one day after the Commission declares effective the
registration statement of which this prospectus is a part. The A-2 warrants have
an initial exercise price of $1.50 per share, which increases to $1.75 six
months and one day after declaration of effectiveness of the registration
statement of which this prospectus is a part. The A-1 warrants and A-2 warrants
become exercisable on the date of our 2003 annual stockholders' meeting for an
aggregate of up to 10,750,000 shares of common stock, subject to customary
anti-dilution provisions for stock splits and the like and subject to
weighted-average anti-dilution provisions that are triggered if we issue shares
of common stock or securities convertible into or exercisable for shares of
common stock, other than excluded securities, at per share prices less than the
then-effective exercise price of the A-1 warrants and A-2 warrants.
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Beginning 36 months and one day after the registration statement of
which this prospectus is a part is declared effective, and subject to a minimum
average dollar trading volume, we may redeem the A-1 warrants and A-2 warrants
for $0.10 per underlying share of common stock if our common stock closes above
$3.00 relative to the A-1 warrants and $3.50 relative to the A-2 warrants for
ten consecutive trading days and exercise limitations are not in effect. The A-1
warrants and A-2 warrants contain a net exercise cashless exercise feature that
will apply at any time after November 19, 2004 that a registration statement
covering the resale of the underlying shares is not effective.
We have included for resale under this prospectus:
o 24,957,083 shares of common stock underlying the face
amount of, and estimated dividends (at an assumed dividend
conversion rate of $0.80 per share) from November 19, 2003 through
November 18, 2005 on, shares of Series A Preferred;
o 5,375,000 shares of common stock underlying A-1 warrants; and
o 5,375,000 shares of common stock underlying A-2 warrants.
RANK AND LIQUIDATION PREFERENCE
Shares of Series A Preferred rank prior to our common stock as to
distribution of assets upon liquidation events, which include a liquidation,
dissolution or winding up of our company, whether voluntary or involuntary. The
liquidation preference of each share of Series A Preferred is equal to the
greater of 143% of the face amount plus all accrued dividends or the amount that
would be distributed upon the number of shares of common stock into which a
share of Series A Preferred could be converted immediately prior to the
liquidation event. The written consent of the holders of Series A Preferred is
required before we can authorize the issuance of any class or series of capital
stock that ranks senior to or PARI PASSU with shares of Series A Preferred.
DIVIDEND RIGHTS
Each share of Series A Preferred has a stated amount of $7,000. The
holders of Series A Preferred are entitled to a dividend payable semi-annually
on June 30 and December 31 of each year, commencing December 31, 2003. The
initial dividend rate of 8% per annum will be adjusted to 12% per annum on May
19, 2005. The dividend is payable in cash or, at our option if there are a
sufficient number of shares of common stock available, in shares of our common
stock valued at the arithmetic mean of the closing sales price of our common
stock for the 30-day period ending on the day prior to the day the dividend
payment is due. If we fail to make a required cash dividend or other cash
payment to a holder within five business days after it is due, the holder will
be entitled to receive interest on the cash amount at a rate equal to the lesser
of 18% per annum and the highest legal rate.
OPTIONAL CONVERSION RIGHTS
Subject to limitations on certain conversions, redemptions and
transfers described below ("Article XII Limitations"), each share of Series A
Preferred is convertible at the option of the holder into shares of our common
stock at any time or from time to time after our 2003 annual meeting of
stockholders at a conversion price that depends upon whether a conversion event
has occurred. Conversion events are:
o a sale, conveyance or disposition of all or substantially all of
our assets;
o the adoption of or entry into any agreement or plan to cause
either a liquidation event or a conversion event, unless the
agreement is terminated or the plan is abandoned prior to the
occurrence of the liquidation event or conversion event;
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o any event, occurrence or transaction, or sequence of related
events, occurrences or transactions (each an "event"), resulting
in holders of our common stock immediately prior to such event
holding or having the right to direct the voting of 50% or less of
the total outstanding voting securities of our company or the
other surviving or acquiring person or entity immediately
following the event; and
o any event resulting in the members of our board of directors
comprising 50% or less of the members of the board of directors of
our company or a surviving or acquiring person or entity
immediately following the event.
The initial conversion price for an optional conversion that occurs
prior to a conversion event is $0.70 per share and is subject to adjustments
described below. Therefore, each share of Series A Preferred initially is
convertible into 10,000 shares of common stock, which number is equal to the
quotient of the $7,000 face amount of the share divided by the $0.70 initial
conversion price.
The number of shares of common stock issuable upon an optional
conversion of a share of Series A Preferred that occurs after a conversion event
will be equal to the quotient of the applicable percentage of the face amount of
the share divided by either the conversion event price or, if the conversion
event price is greater than $1.00, then the conversion price. The conversion
event price in the case of a sale of all or substantially all of our assets will
be equal to the total consideration we receive per share of common stock
outstanding at the time of the conversion event. In the case of any other
conversion event, the conversion event price will be equal to the arithmetic
mean of the closing sales price of our common stock for the 30-day period prior
to the day we receive the notice of conversion. If the conversion event price is
greater than $1.00, then the applicable percentage of the face amount is 100%.
If the conversion event price is less than or equal to $1.00, then the
applicable percentage of the face amount is 143%.
If, after the occurrence of a conversion event, we are prohibited from
issuing shares of common stock upon an optional conversion as a result of
Article XII Limitations, then we must notify the holders of Series A Preferred,
and the holders will then have the right, at any time and from time to time
thereafter, have the option to require us to redeem for cash up to the number of
shares of Series A Preferred that, after giving effect to the redemption, the
then unissued shares portion of the holder's pro rata share of the cap amount
described below is at least equal to 100% of the total number of shares of
common stock issuable upon conversion of such holder's shares of Series A
Preferred.
Upon conversion of a share of Series A Preferred, we must pay to the
holder in cash all amounts then accrued or payable on the share through and
including the conversion date. In lieu of issuing fractional shares of common
stock, we may pay cash for a fractional share based on the closing sales price
at that time, or we may round up to the next whole share.
The delivery period for shares of common stock issuable upon an
optional conversion is the two business days following the conversion date. If
we fail to deliver shares of common stock prior to the sixth business day after
the expiration of the delivery period, then unless the holder otherwise elects
to retain its status as a holder of those shares of common stock by notifying us
within five business days after the expiration of the six business-day period
that follows the expiration of the delivery period, the holder will regain its
rights as a holder of Series A Preferred Stock and we will be required to return
to the holder the shares of Series A Preferred that were the subject of the
optional conversion.
MANDATORY CONVERSION REQUIREMENTS
If at any time after the date that is 18 months after the Effective
Date (as defined below), all of the following required conditions are satisfied,
then subject to the Article XII Limitations, all of the shares of Series A
Preferred will automatically convert into a number of shares of common stock
that is calculated as if an optional conversion were occurring:
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o our stockholders have approved the issuance of the Series A
Preferred and related transactions, as described in the securities
purchase agreement relating to the Series A Preferred;
o a registration statement covering the resale of the shares of
common stock underlying the Series A Preferred and related A-1
warrants and A-2 warrants ("Series A Warrants") has been declared
effective by the Securities and Exchange Commission (the date on
which the registration statement is declared effective is referred
to as the "Effective Date");
o the closing sale price of our common stock is greater than $2.10
per share for at least ten of 15 consecutive trading days (the
tenth day is referred to as the "Trigger Date");
o during the 30 trading day period ending on the Trigger Date, the
average dollar trading volume for the lowest 20 dollar volume
trading days is not less than $400,000, with dollar volume
measured by reference to closing sale prices;
o all shares of common stock issuable upon conversion of the Series
A Preferred and Series A Warrants are authorized and reserved for
issuance, registered for resale by their holders, and eligible to
be listed or traded on The Nasdaq National Market, The Nasdaq
SmallCap Market, the New York Stock Exchange or the American Stock
Exchange (each, a "Principal Market");
o no redemption event, as described below, has occurred without
being cured; and
o all amounts then accrued or payable under the certificate of
designation relating to the Series A Preferred or under the
securities purchase agreement have been paid.
If we are prohibited from issuing any shares of common stock upon a
mandatory conversion as a result of Article XII Limitations, then the shares of
Series A Preferred that are not then able to be converted will cease to accrue
dividends and will be converted into shares of our common stock as the Article
XII Limitations from time to time permit.
REDEMPTION RIGHTS
Each holder of Series A Preferred will have the right to require us to
redeem by purchasing for cash any or all of their then outstanding shares of
Series A Preferred for an amount per share equal to the redemption amount in
effect at the time of redemption, at any time and from time to time after one of
the following redemption events occurs and is continuing:
o the holders of our common stock fail to approve on or before
January 18, 2004 the authorization of the issuance of shares of
common stock in excess of 19.999% of the number of shares of
common stock outstanding as of November 19, 2003;
o our common stock is suspended from trading or is not listed and
authorized for trading on a Principal Market for an aggregate of
ten or more trading days in any twelve-month period;
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o the registration statement covering the shares of common stock
issuable upon conversion of the Series A Preferred has not been
declared effective by February 17, 2004 or the registration
statement, after being declared effective, cannot be used by the
holders of Series A Preferred for the resale of all of their
registrable securities for an aggregate of more than 60 days;
o we fail to remove a restrictive legend on certificates
representing shares of common stock issued upon conversion of
Series A Preferred where removal of the legend is required by the
certificate of designation or the securities purchase agreement
and the failure continues uncured for five business days after we
receive written notice from the holder regarding the failure;
o we indicate through a press release or to a holder of Series A
Preferred that we do not intend to honor conversions of shares of
Series A Preferred in accordance with the terms of the certificate
of designation;
o we or one of our subsidiaries, other than Pulsar Data Systems,
Inc., makes an assignment for the benefit of creditors or a
receiver or trustee for a substantial part of our assets or the
subsidiary's assets is appointed;
o we or one of our subsidiaries, other than Pulsar Data Systems,
Inc., institutes bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for the relief of
debtors; or
o we otherwise breach any material term under the securities
purchase agreement, the related registration rights agreement or
the common stock purchase warrants issued in connection with the
Series A Preferred and, if the breach is curable, fail to cure the
breach within ten business days after receipt of written notice
from a holder of Series A Preferred.
If the redemption event is the failure of our stockholders to timely
authorize the issuance of shares of common stock in excess of 19.999% of the
number of shares of common stock outstanding as of November 19, 2003, then the
redemption amount for each share of Series A Preferred in excess of a holder's
pro rata share of the cap amount will be equal to the face amount of the share
plus all accrued dividends on the share through the date of payment of the
redemption amount. In the case of all other redemption events, except as
described in the following paragraph, the redemption amount will be equal to the
quotient of 143% of the face amount plus accrued dividends divided by the lesser
of the then current conversion price and the value of a share of common stock
valued at the arithmetic mean of the closing sales price of our common stock for
the 30-day period prior to when we receive the redemption notice.
With respect to the redemption events relating to our failure to remove
restrictive legends and our indication that we do not intend to honor
conversions of shares of Series A Preferred in accordance with the terms of the
certificate of designation, the redemption amount will be the greater of the
redemption amount described in the last sentence of the preceding paragraph and
the "parity value" of the shares to be redeemed. The "parity value" will be the
product of (i) the highest number of shares of common stock issuable upon an
optional conversion of the shares of Series A Preferred Stock without giving
effect to any limitations on conversion and treating the trading day immediately
preceding the redemption date as the conversion date and (ii) the highest
closing price of a share of common stock during the period beginning on the date
of first occurrence of the redemption event and ending one trading day prior to
the redemption date.
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If we fail to pay the redemption amount for a share of Series A
Preferred within five business days after receiving a redemption notice, then
the holder of the share will be entitled to interest on the redemption amount at
a rate equal to the lower of 24% per annum and the highest legal rate until we
pay the redemption amount. If we are unable to redeem all shares of Series A
Preferred that are covered by redemption notices, then we must redeem shares to
the extent we are able from each redeeming holder on a pro rata basis.
CONVERSION PRICE ADJUSTMENTS
The conversion price is subject to customary adjustment for stock
splits, stock combinations, stock dividends, mergers, consolidations,
distributions of assets, issuances of convertible securities and purchase rights
pro rata to holders of our common stock, and the like. The conversion price also
is subject to downward weighted-average anti-dilution adjustments if we issue
shares of common stock or securities convertible into or exercisable for shares
of common stock, other than excluded securities, at per share prices less than
the then effective conversion price. Excluded securities are:
o securities purchased under the securities purchase agreement
relating to the Series A Preferred;
o convertible securities or purchase rights outstanding on November
19, 2003;
o shares of common stock issued or issuable to employees, directors
or consultants pursuant to our existing stock option or restricted
stock plans or as approved by holders of Series A Preferred as
compensation for services rendered to us;
o shares of common stock issued or issuable to vendors or lenders
pursuant to warrants approved by our board of directors;
o securities issued in a bona fide public offering or in connection
with our acquisition of an entity or a stock split, stock dividend
or recapitalization; and
o borrowings from financial institutions, provided that the equity
portion of the borrowings and interests convertible into common
stock does not exceed 10% of the borrowing.
VOTING RIGHTS AND BOARD REPRESENTATION
So long as any shares of Series A Preferred are outstanding, the
holders of Series A Preferred, voting as a separate class, will be entitled to
elect one Class I member to our board of directors. Prior to the date the
registration statement covering the shares of common stock underlying the Series
A Preferred is declared effective, the holders of shares of Series A Preferred
will also have the right to elect one Class II member to our board of directors.
The holders of our common stock, as a class and without the holders of Series A
Preferred, will have the right to elect the remaining members of our board of
directors.
On any matters as to which the Delaware General Corporation Law
requires the vote of the holders of Series A Preferred, voting together as one
class with the holders of common stock, each share of Series A Preferred will
have a number of votes equal to the number of shares of common stock into which
it is then convertible, subject to 4.999% ownership limitations described below
and except that the number of votes to which a share of Series A Preferred is
entitled will be determined without taking into account any conversion price
adjustments that may have occurred. Subject to the voting requirements described
below, and except as otherwise may be required under the Delaware General
Corporation Law, on the matters described in the preceding sentence, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of Series A Preferred will constitute approval of the holders
of Series A Preferred.
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The approval of holders of at least 75% of the then-outstanding shares
of Series A Preferred is required in order for us to enter into an agreement,
commitment or understanding regarding any actions in which we would:
o alter the rights, preferences or privileges of the Series A
Preferred or increase the authorized number of shares of Series A
Preferred;
o alter the rights, preferences or privileges of any of our capital
stock so as to affect adversely the Series A Preferred;
o create or issue any securities ranking senior to the Series A
Preferred as to distribution of assets upon a liquidation event;
or
o issue any shares of Series A Preferred other than pursuant to the
securities purchase agreement or as payment of a dividend on
outstanding shares of Series A Preferred.
The approval of holders of a majority of the then-outstanding shares of
Series A Preferred is required in order for us to enter into an agreement,
commitment or understanding in which we would:
o redeem, repurchase or acquire, or declare or pay any cash dividend
or distribution on, any securities ranking junior to the Series A
Preferred as to distribution of assets upon a liquidation event,
other than pursuant to an equity compensation plan approved by our
board of directors; or
o create or allow to exist a lien or security interest on our assets
other than one covering accounts receivable in favor of Bay View
Funding or a replacement lender or factor, a precautionary
security interest taken by an equipment lessor, an interest in our
intellectual property that is created in favor of a government or
government prime contractor in connection with a government
project, and any lien or security interest created by operation of
law.
EXCHANGE RIGHT
Holders of Series A Preferred have a five-trading day right to exchange
their shares of Series A Preferred at 100% of face value for new securities that
we may propose to issue. New securities include all common stock, preferred
stock and other securities that are exercisable for or convertible into shares
of common stock, other than excluded securities described above. However, the
exchange right does not apply to any particular offering of new securities with
a per share offering price equal to or greater than the then-effective
conversion price after we have accepted binding subscriptions of $5,000,000 or
more in the offering.
RIGHT OF FIRST OFFER
Until May 19, 2004, holders of Series A Preferred have a five-trading
day right of first offer with respect to issuances of new securities. Each
holder may purchase an amount of new securities valued at up to 50% of the face
amount of the holder's shares of Series A Preferred for the price and upon the
terms specified by us in a written notice. If holders of Series A Preferred fail
to exercise fully the right of first offer, we will have 60 days to sell the new
securities or to enter into an agreement to sell the new securities within 90
days from the date of the agreement.
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RESERVATION OF SHARES
We initially were required to reserve 30,745,000 shares of common stock
for issuance upon conversion of shares of Series A Preferred and are required to
maintain a sufficient number of reserved shares of common stock to allow for the
conversion of all shares of Series A Preferred. If we fail to maintain adequate
reserves for a period of three consecutive trading days plus an additional 90
days, then each holder of Series A Preferred will have the option, exercisable
in whole or in part at any time or from time to time, to require us to redeem
for cash, at an amount per share equal to the redemption amount as described
above, a number of the holder's shares of Series A Preferred such that, after
giving effect to the redemption, the then unissued portion of the holder's pro
rata share of the reserved amount is at least equal to 100% of the total number
of shares of common stock issuable upon conversion of the holder's shares of
Series A Preferred.
ARTICLE XII LIMITATIONS ON CERTAIN CONVERSIONS, REDEMPTIONS AND
TRANSFERS
The number of shares issuable in connection with optional conversions,
mandatory conversions and redemptions may not exceed any cap amount prescribed
by any market upon which our common stock is then listed or traded. For example,
the rules of The Nasdaq National Market require us to obtain stockholder
approval of the issuance of a number of shares of common stock, or securities
exercisable for or convertible into common stock, equal to or greater than 20%
of the number of shares of our common stock outstanding prior to the issuance,
if the issuance is for a price that is less than the greater of the book value
or market value of our common stock at the time of issuance. The cap amount
shall be allocated pro rata to the holders of Series A Preferred and other
securities issued pursuant to the securities purchase agreement or related
agreements.
In addition, no holder of Series A Preferred may receive in connection
with optional conversions, mandatory conversions or redemptions a number of
shares of common stock that would result in the holder and its affiliates
together beneficially owning more than 4.99% of the then-outstanding shares of
our common stock, as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. This limitation may only be altered
or removed with the vote or written approval of a majority of the outstanding
shares of our common stock and the written approval of holders of at least 50%
of the outstanding shares of Series A Preferred.
BURNHAM HILL PARTNERS PLACEMENT AGENT AND EXCHANGE AGENT WARRANTS
In August 2003, we engaged Burnham Hill Partners, a division of
NASD-member firm Pali Capital, Inc. ("BHP"), to act as our placement agent to
locate investors interested in acquiring our securities. We paid to BHP a cash
fee of $26,250, or 3.5% of gross proceeds we received, in connection with the
issuance of the September 2003 cash exercise shares, and $723,723, or
approximately 7.6% of gross cash proceeds we received, in connection with new
capital raised in the Series A financing. We also agreed to pay to BHP 4% of
gross proceeds we receive in connection with the cash exercise of A-1 warrants
and A-2 warrants.
In addition, we issued to BHP five-year placement agent warrants to
purchase up to 1,102,389 shares of common stock, or 7% of the shares of common
stock underlying the aggregate number of shares of Series A Preferred issued for
new capital, and exchange agent warrants to purchase up to 138,433 shares of
common stock, or 2.5% of the shares of common stock underlying the aggregate
number of shares of Series A Preferred issued in exchange for the cancellation
of notes. The placement agent warrants become exercisable on the date of our
2003 annual stockholders' meeting at an exercise price of $0.70 per share,
subject to customary anti-dilution provisions for stock splits and the like and
subject to weighted-average anti-dilution provisions that are triggered if we
issue shares of common stock or securities convertible into or exercisable for
shares of common stock, other than excluded securities, at per share prices less
than the then-effective exercise price of placement agent warrants. The
placement agent warrants have a net exercise cashless exercise provision. The
exchange agent warrants have the same terms as the placement agent warrants
except that their exercise price is $0.01 per share.
45
We also issued to BHP additional exchange agent warrants to purchase up
to 53,571 shares of common stock, or 2.5% of the shares of common stock
underlying the aggregate number of shares of into which the additional retained
notes may be converted.
The term of the engagement letter with BHP is twelve months. In
conjunction with the engagement letter with BHP, we executed a separate letter
indemnifying BHP and its related parties for services provided under the
engagement letter. Under the indemnification letter, we generally agreed to
indemnify and hold harmless BHP and its affiliates, the respective directors,
officers, partners, agents and employees BHP and its affiliates, and each other
person, if any, controlling BHP or any of its affiliates (collectively,
"Indemnified Persons"), from and against, any losses, claims, damages or
liabilities related to or arising out of the engagement, except for losses,
claims, damages or liabilities that are finally judicially determined to have
resulted primarily from BHP's bad faith or gross negligence or breach of the
engagement agreement. We agreed that if indemnification is for any reason not
available or insufficient to hold BHP harmless, we will contribute to the losses
involved in such proportion as is appropriate to reflect the relative benefits
received (or anticipated to be received) by us and by BHP with respect to the
engagement or, if such allocation is judicially determined unavailable, in such
proportion as is appropriate to reflect other equitable considerations such as
the relative fault of us on the one hand and of BHP on the other hand; provided,
however, that, to the extent permitted by applicable law, the Indemnified
Persons shall not be responsible for amounts that in the aggregate exceed the
fees actually received by BHP from us in connection with the engagement.
Kimball & Cross Investment Management Corp. ("Kimball & Cross") and
ViewTrade Financial, each an NASD-member firm, acted as subplacement agents for
BHP in connection with the Series A financing. BHP transferred the placement
agent warrants and exchange agent warrants to three entities and twelve
individuals. The three entities were Burnham Hill Holdings LLC, an affiliate of
BHP, Kimball & Cross, and Hudson Valley Capital Management, LLC. The twelve
individuals were principals or employees of BHP, Kimball & Cross and ViewTrade
Financial.
We have included for resale under this prospectus:
o 1,102,389 placement agent warrants; and
o 192,004 exchange agent warrants.
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock being offered under this prospectus on any
stock exchange, automated inter-dealer quotation system, market or trading
facility on which the shares are traded, or in the over-the-counter market, or
private transactions. These sales, which may include block transactions, may be
at fixed or negotiated prices. The selling security holders may use any one or
more of the following methods when disposing of shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales, which are contracts for the sale of shares of stock
that the seller does not own, or certificates for which are not
within the seller's control, so as to be available for delivery at
the time when, under applicable rules, delivery must be made;
o transactions to cover short sales;
o through the distribution of the shares by any selling security
holder to its partners, members or stockholders;
o broker-dealers may agree with the selling security holders to sell
a specified number of shares at a stipulated price per share;
o one or more underwritten offerings on a firm commitment or best
efforts basis;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law.
The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holders have
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
The selling security holders may also engage in short sales against the
box, which are sales where the seller owns enough shares to cover the borrowed
shares, if necessary, puts and calls and other transactions in our securities or
derivatives of our securities and may sell or deliver shares in connection with
these trades. The selling security holders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a selling
security holder defaults on a margin loan, the broker may, from time to time,
offer and sell the pledged shares.
47
Notwithstanding the terms of this plan of distribution, the selling
security holders may not use shares offered under this prospectus to cover short
sales or short sales against the box that are made before the registration
statement of which this prospectus is a part becomes effective.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, which commissions as to a particular broker or dealer
may be in excess of customary commissions to the extent permitted by applicable
law.
If sales of shares offered under this prospectus are made to
broker-dealers as principals, we would be required to file a post-effective
amendment to the registration statement of which this prospectus is a part. In
the post-effective amendment, we would be required to disclose the names of any
participating broker-dealers and the compensation arrangements relating to such
sales.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares offered under this prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with these
sales. Commissions received by these broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Any broker-dealers or agents
that are deemed to be underwriters may not sell shares offered under this
prospectus unless and until we set forth the names of the underwriters and the
material details of their underwriting arrangements in a supplement to this
prospectus or, if required, in a replacement prospectus included in a
post-effective amendment to the registration statement of which this prospectus
is a part.
The selling security holders may sell all or any part of the shares
offered under this prospectus through an underwriter. To our knowledge, no
selling security holder has entered into any agreement with a prospective
underwriter, and we cannot assure you as to whether any such agreement will be
entered into. If a selling security holder informs us that it has entered into
such an agreement or agreements, any material details will be set forth in a
supplement to this prospectus or, if required, in a replacement prospectus
included in a post-effective amendment to the registration statement of which
this prospectus is a part.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act and the rules and regulations under
that act, including Regulation M. These provisions may restrict activities of,
and limit the timing of purchases and sales of any of the shares by, the selling
security holders or any other person. Furthermore, under Regulation M, persons
engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and other activities with respect to those securities
for a specified period of time prior to the commencement of such distributions,
subject to specified exceptions or exemptions. All of these limitations may
affect the marketability of the shares.
This prospectus does not cover the sale or other transfer of any of the
derivative securities whose underlying shares of common stock are being offered
for sale pursuant to this prospectus. If a selling security holder transfers
those derivative securities prior to conversion or exercise, then the transferee
of those derivative securities may not sell the underlying shares of common
stock under this prospectus unless we amend or supplement this prospectus to
cover such sales.
In addition, if any of the shares of common stock offered for sale
pursuant to this prospectus are transferred other than pursuant to a sale under
this prospectus, then subsequent holders could not use this prospectus until a
post-effective amendment or prospectus supplement is filed, naming such holders.
We offer no assurance as to whether any of the selling security holders will
sell all or any portion of the shares offered under this prospectus.
48
For the period a selling security holder holds a derivative security
whose underlying shares of common stock are being offered for sale pursuant to
this prospectus, the selling security holder has the opportunity to profit from
a rise in the market price of our common stock without assuming the risk of
ownership of the underlying shares of common stock. The terms on which we could
obtain additional capital during the period in which those derivative securities
remain outstanding may be adversely affected. The holders of derivative
securities are most likely to voluntarily convert or exercise their derivative
securities when the conversion or exercise price is less than the market price
for our common stock. However, we offer no assurance as to whether any of those
derivative securities will be converted or exercised.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered under this prospectus. Rather, the selling security holders
will receive those proceeds directly for their own accounts.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") permits a
corporation to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with a pending or completed action, suit or proceeding if the officer
or director acted in good faith and in a manner the officer or director
reasonably believed to be in the best interests of the corporation.
Our amended and restated certificate of incorporation provides that,
except in certain specified instances, our directors shall not be personally
liable to us or our stockholders for monetary damages for breach of their
fiduciary duty as directors.
In addition, our amended and restated certificate of incorporation and
bylaws obligate us to indemnify our directors and officers against expenses and
other amounts reasonably incurred in connection with any proceeding arising from
the fact that such person is or was an agent of ours. Our bylaws also authorize
us to purchase and maintain insurance on behalf of any of our directors or
officers against any liability asserted against that person in that capacity,
whether or not we would have the power to indemnify that person under the
provisions of the DGCL.
The employment agreements we entered into with Marvin J. Winkler, our
co-chairman of the board and chief executive officer, Kris Shah, our president,
chief operating officer and secretary, and Thomas E. Schiff, our executive vice
president and chief financial officer, contain indemnity provisions. Those
provisions require us to indemnify the executives in connection with third party
actions and in connection with proceedings by or in the right of our company,
and to advance expenses prior to the final disposition of an action or
proceeding, to the fullest extent permitted by Section 145 of the DGCL. Those
provisions also prohibit us from bringing an action against the executives after
the expiration of two years from the date the executives cease to serve in the
capacities covered by the employment agreements.
We and certain of the selling security holders each have agreed to
indemnify the other and their respective officers, directors and other
controlling persons against certain liabilities in connection with this
registration, including liabilities under the Securities Act, and to contribute
to payments such persons may be required to make in respect thereof.
49
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling us
under the provisions described above, we have been informed that in the opinion
of the Commission, indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
EXPERTS
The consolidated financial statements and financial statement schedule
of SSP Solutions, Inc. and subsidiaries as of December 31, 2002, and for the
year then ended, have been incorporated by reference into this prospectus and
into the registration statement of which this prospectus is a part in reliance
upon the report of Haskell & White LLP, independent auditors, which report is
incorporated by reference into this prospectus, and upon authority of that firm
as experts in accounting and auditing.
The consolidated financial statements and financial statement schedule
of SSP Solutions, Inc. and subsidiaries as of December 31, 2001, and for each of
the years in the two-year period ended December 31, 2001, have been incorporated
by reference herein, and in the registration statement, in reliance upon the
report of KPMG LLP, independent auditors, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
Each of the audit reports covering the December 31, 2002 and 2001,
consolidated financial statements contains an explanatory paragraph that states
that the Company's significant operating losses, cash used in operating
activities, accumulated deficit and deficit working capital raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
LEGAL MATTERS
The legality of the securities offered under this prospectus will be
passed upon for us by Rutan & Tucker, LLP, Costa Mesa, California.
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is American
Stock Transfer & Trust Company. Its telephone number is (212) 936-5100.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Commission. You may read and copy any document we
file at the Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for
information on the operation of the Public Reference Room. Our electronic
filings with the Commission are also available to the public at the Commission's
Internet site at http://www.sec.gov. Our common stock is quoted on The Nasdaq
National Market under the symbol "SSPX". Our reports, proxy statements and other
information are also available to the public on Nasdaq's Internet site at
http://www.nasdaq.com.
This prospectus is part of a registration statement on Form S-3 filed
with the Commission under the Securities Act. This prospectus omits some of the
information contained in the registration statement. You should refer to the
registration statement for further information with respect to SSP Solutions,
Inc. and the securities offered by this prospectus. Any statement contained in
this prospectus concerning the provisions of any document filed as an exhibit to
the registration statement or otherwise filed with the Commission is not
necessarily complete, and in each case you should refer to the copy of the
document filed for more complete information.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Commission allows us to incorporate by reference information we
file with it, which means we can disclose important information to you by
referring you to documents we have filed with the Commission. The information
incorporated by reference is considered to be a part of this prospectus. We
incorporate by reference the documents listed below and any future filings we
make with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act prior to the termination of the offering covered by this
prospectus:
o Our current report on Form 8-K for January 27, 2003, filed with
the Commission on January 30, 2003 (File No. 000-26227);
o Our quarterly report on Form 10-QSB for the quarter ended March
31, 2003, filed with the Commission on May 20, 2003;
o Our current report on Form 8-K for July 11, 2003, filed with the
Commission on August 5, 2003;
o Our quarterly report on Form 10-QSB for the quarter ended June 30,
2003, filed with the Commission on August 19, 2003;
o Our current report on Form 8-K for August 27, 2003, filed with the
Commission on September 9, 2003;
o Amendment no. 1 to our quarterly report on Form 10-QSB for the
quarter ended March 31, 2003, filed with the Commission on
September 16, 2003;
o Amendment no. 2 to our annual report on Form 10-K for the year
ended December 31, 2002, filed with the Commission on September
16, 2003;
o Our current report on Form 8-K for September 26, 2003, filed with
the Commission on September 30, 2003;
51
o Our current report on Form 8-K for November 5, 2003, filed with
the Commission on November 5, 2003;
o Our current report on Form 8-K for November 17, 2003, filed with
the Commission on November 21, 2003;
o Our quarterly report on Form 10-QSB for the quarter ended
September 30, 2003, filed with the Commission on November 19,
2003;
o Our current report on Form 8-K for December 10, 2003, filed with
the Commission on December 11, 2003; and
o The description of our capital stock contained in our current
report on Form 8-K for November 17, 2003, filed with the
Commission on November 21, 2003.
Any statement in a document incorporated or deemed to be incorporated
by reference in this prospectus is deemed to be modified or superseded to the
extent that a statement contained in this prospectus, or in any other document
we subsequently file with the Commission, modifies or supersedes that statement.
If any statement is modified or superseded, it does not constitute a part of
this prospectus, except as modified or superseded.
Not withstanding the above, information that is "furnished to" the
Commission shall not be deemed "filed with" the Commission and shall not be
deemed incorporated by reference into this prospectus or the registration
statement of which this prospectus is a part.
The consolidated financial statements and related independent auditors'
reports included in the initial filing of and amendment no. 1 to our annual
report on Form 10-K for the year ended December 31, 2002 ("superseded
financials") have been superseded by the consolidated financial statements that
are included in amendment no. 2 to our annual report on Form 10-K for the year
ended December 31, 2002. As a result, the superseded financials do not
constitute part of this prospectus or the registration statement of which this
prospectus is a part.
We will provide to each person, including any beneficial owner, to whom
a prospectus is delivered, a copy of any or all of the information that has been
incorporated by reference in this prospectus but not delivered with this
prospectus. You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address and phone number:
SSP Solutions, Inc.
17861 Cartwright Road
Irvine, California 92614
Attention: Thomas E. Schiff, Chief Financial Officer
Telephone: (949) 851-1085
52
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable in connection with the issuance and distribution of
the securities being registered (estimated except for the registration fee), all
of which will be borne by the registrant, are as follows:
Securities and Exchange Commission registration fee .........$ 4,468
Printing expenses............................................$ 3,500
Legal fees and expenses......................................$ 20,000
Accounting fees..............................................$ 35,000
Miscellaneous expenses.......................................$ 1,000
----------
Total.................................$ 63,968
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a
corporation to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with a pending or completed action, suit or proceeding if the officer
or director acted in good faith and in a manner the officer or director
reasonably believed to be in the best interests of the corporation.
The registrant's amended and restated certificate of incorporation
provides that, except in certain specified instances, a director of the
registrant shall not be personally liable to the registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director.
In addition, the registrant's amended and restated certificate of
incorporation and bylaws obligate the registrant to indemnify its directors and
officers against expenses and other amounts reasonably incurred in connection
with any proceeding arising from the fact that such person is or was an agent of
the registrant. The bylaws also authorize the registrant to purchase and
maintain insurance on behalf of any director or officer of the registrant
against any liability asserted against that person in that capacity, whether or
not the registrant would have the power to indemnify that person under the
provisions of the Delaware General Corporation Law.
The employment agreements the registrant entered into with Marvin J.
Winkler, the registrant's co-chairman of the board and chief executive officer,
Kris Shah, the registrant's president, chief operating officer and secretary,
and Thomas E. Schiff, the registrant's executive vice president and chief
financial officer, contain indemnity provisions. Those provisions require the
registrant to indemnify the executives in connection with third party actions
and in connection with proceedings by or in the right of the registrant, and to
advance expenses prior to the final disposition of an action or proceeding, to
the fullest extent permitted by Section 145 of the DGCL. Those provisions also
prohibit the registrant from bringing an action against the executives after the
expiration of two years from the date the executives cease to serve in the
capacities covered by the employment agreements.
The registrant and certain of the selling security holders in the
offering covered by this registration statement each have agreed to indemnify
the other and their respective officers, directors and other controlling persons
against certain liabilities in connection with this registration statement,
including liabilities under the Securities Act, and to contribute to payments
such persons may be required to make in respect thereof.
II-1
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the registrant under the provisions described above, the registrant has been
informed that in the opinion of the Commission, indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM 16. EXHIBITS.
Exhibit No. Description
----------- -----------
4.1 Securities Purchase Agreement dated as of November 19, 2003
among SSP Solutions, Inc. and the investors named in Exhibit A
thereto (1)
4.2 Form of Series A-1 Warrant dated as of November 19, 2003
issued by SSP Solutions, Inc. in favor of each investor named
in Exhibit A to the Securities Purchase Agreement of even date
therewith (1)
4.3 Form of Series A-2 Warrant dated as of November 19, 2003
issued by SSP Solutions, Inc. in favor of each investor named
in Exhibit A to the Securities Purchase Agreement of even date
therewith (1)
4.4 Registration Rights Agreement dated as of November 19, 2003
among SSP Solutions, Inc. and each investor named in Exhibit A
thereto (1)
4.5 Form of Secured Convertible Promissory Note dated November 19,
2003 made by SSP Solutions, Inc. in favor of Richard P.
Kiphart, Crestview Capital Fund, L.P. and Crestview Capital
Fund II, L.P. in the principal amounts of $1,250,000, $350,000
and $130,000, respectively (issued as retained note that
replaces note dated April 16, 2002) (1)
4.6 Form of Secured Convertible Promissory Note dated November 19,
2003 made by SSP Solutions, Inc. in favor of Richard P.
Kiphart, Crestview Capital Fund, L.P., Crestview Capital Fund
II, L.P. and Crestview Offshore Fund, Inc. in the principal
amounts of $1,000,000, $325,000, $150,000 and $25,000,
respectively (issued as additional retained note that has
automatic conversion feature triggered by stockholder approval
and that replaces note dated April 16, 2002) (1)
4.7 Form of Warrant to Purchase Common Stock dated November 19,
2003 issued by SSP Solutions, Inc. in favor of Richard P.
Kiphart, Crestview Capital Fund, L.P., Crestview Capital Fund
II, L.P. and Crestview Offshore Fund, Inc. as to 714,286
shares, 232,143 shares, 107,143 shares and 17,857 shares,
respectively (issued in accompaniment with additional retained
note that has automatic conversion feature triggered by
stockholder approval and that replaces note dated April 16,
2002) (1)
4.8 Warrant dated July 31, 2000, issued by BIZ Interactive Zone,
Inc. in favor of Roth Capital Partners, Inc. as to 23,756
shares, assumed by SSP Solutions, Inc. in the acquisition of
BIZ Interactive Zone, Inc.
II-2
4.9 Agreement of Settlement on Stipulated Judgment dated August
29, 2003 between SSP Solutions, Inc. and Research Venture, LLC
(3)
4.10 Lease Surrender and Termination Agreement dated August 29,
2003 between SSP Solutions, Inc. and Research Venture, LLC (3)
4.11 Amended Stipulation for Entry of Judgment dated August 29,
2003 between SSP Solutions, Inc. and Research Venture, LLC (3)
4.12 Promissory Note dated August 27, 2003, in the amount of
$500,000 made by SSP Solutions, Inc. in favor of Richard P.
Kiphart, cancelled in payment of exercise price of re-priced
warrants (5)
4.13 Promissory Note dated August 27, 2003, in the amount of
$250,000 made by SSP Solutions, Inc. in favor of Crestview
Capital Fund II, L.P., cancelled in payment of exercise price
of re-priced warrants (5)
4.14 Bridge Loan Agreement dated September 1, 2003, by and among
Richard P. Kiphart, Crestview Capital Fund, L.P., Crestview
Capital Fund II, L.P., SDS Merchant Fund, L.P., and SSP
Solutions, Inc. in the amount of $1,500,000 (5)
4.15 Form of 10% Convertible Bridge Notes dated September 1, 2003,
September 17, 2003 and October 6, 2003 made by SSP Solutions,
Inc. in favor of Richard P. Kiphart, SDS Merchant Fund, L.P.,
Crestview Capital Fund, L.P., and Crestview Capital Fund II,
L.P., respectively, in the principal amounts of $500,000,
$750,000, $100,000 and $150,000, respectively (5)
4.16 Form of Warrants issued with 10% Convertible Bridge Notes
dated September 1, 2003, September 17, 2003 and October 6,
2003 made by SSP Solutions, Inc. in favor of Richard P.
Kiphart, SDS Merchant Fund, L.P., Crestview Capital Fund,
L.P., and Crestview Capital Fund II, L.P., respectively, as to
166,667, 250,000, 33,333 and 50,000 shares of common stock,
respectively (5)
4.17 Forbearance Agreement dated September 1, 2003, made by and
among SSP Solutions, Inc. and Richard P. Kiphart, Crestview
Capital Fund, L.P., Crestview Capital Fund II, L.P., Crestview
Offshore Fund, Inc., Robert Geras and Nefilim Associates, LLC
(5)
4.18 Form of First Amendment to Warrants to Purchase Common Stock
(subject to a registration statement) made and entered into as
of September 1, 2003, by and between SSP Solutions, Inc., and
Richard P. Kiphart, Crestview Capital Fund, L.P., Crestview
Capital Fund II, L.P., Crestview Offshore Fund, Inc., Robert
Geras and Nefilim Associates, LLC, respectively (5)
4.19 Form of First Amendment to Warrants to Purchase Common Stock
(not subject to a registration statement) made and entered
into as of September 1, 2003, by and between SSP Solutions,
Inc., and Richard P. Kiphart, Crestview Capital Fund, L.P.,
and Crestview Capital Fund II, L.P., respectively (5)
4.20 Placement Agent Agreement dated August 26, 2003, between SSP
Solutions, Inc. and Burnham Hill Partners in connection with
the sale of Series A Convertible Preferred Stock (5)
II-3
4.21 Form of Placement Agent Warrants dated as of November 19, 2003
issued by SSP Solutions, Inc. in favor of Burnham Hill
Holdings, LLC (as to 800,000 shares of common stock), Hilary
Bergman (as to 49,204 shares), Brad Reifler (as to 49,204
shares), Matthew Balk (as to 65,000 shares), Eric Singer (as
to 20,681 shares), Hudson Valley Capital Management (as to
50,720 shares), Chris Shufeldt (as to 1,750 shares), Kimball &
Cross Investment Management Corp. (as to 5,830 shares), Brian
Herman (as to 27,040 shares), Sean Callahan (as to 7,600
shares), Mark Ford (as to 12,960 shares), Daniel Pietro (as to
900 shares), Claude Ware (as to 4,000 shares), James St. Clair
(as to 6,000 shares) and Roger Lockhart (as to 1,500 shares)
4.22 Form of Exchange Agent Warrants dated as of November 19, 2003
issued by SSP Solutions, Inc. in favor of Burnham Hill
Holdings, LLC (as to 163,000 shares of common stock), Hilary
Bergman (as to 9,599 shares), Brad Reifler (as to 9,599
shares) and Matthew Balk (as to 9,806 shares)
4.23 Warrant Agreement dated as of June 14, 1999 between Litronic
Inc. and BlueStone Capital Partners, L.P. and Pacific Crest
Securities Inc. (6)
4.24 Forbearance Agreement dated March 12, 2003 between SSP
Solutions, Inc. and Integral Systems, Inc., effective
September 1, 2002 (7)
4.25 Warrant to Purchase Common Stock dated March 12, 2003 by SSP
Solutions, Inc. to Integral Systems, Inc. (7)
5 Opinion of Rutan & Tucker, LLP (*)
23.1 Consent of Haskell & White LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
23.3 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1)
24 Power of Attorney (contained on the signature page to this
registration statement)
__________________
(*) To be filed by amendment.
(1) Filed with the Commission on November 21, 2003 as an exhibit
to the registrant's current report on Form 8-K for November
17, 2003 and incorporated herein by reference.
(2) Filed with the Commission on November 4, 2002 as an exhibit to
the registrant's current report on Form 8-K for October 23,
2002 and incorporated herein by reference.
(3) Filed with the Commission on September 9, 2003 as an exhibit
to the registrant's current report on Form 8-K for August 27,
2003 and incorporated herein by reference.
(4) Filed with the Commission on October 8, 2002 as an exhibit to
the registrant's current report on Form 8-K for September 27,
2002 and incorporated herein by reference.
II-4
(5) Filed with the Commission on November 19, 2003 as an exhibit
to the registrant's quarterly report on Form 10-QSB for
September 30, 2003 and incorporated herein by reference.
(6) Filed as an exhibit to Amendment No. 2 to the registrant's
Form S-1 filed with the Commission on May 6, 1999
(registration statement no. 333-72151) and incorporated herein
by reference.
(7) Filed as an exhibit to the initial filing of the registrant's
Form 10-K for the year ended December 31, 2002 (file no.
000-26227) and incorporated herein by reference.
II-5
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) to 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, 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; and
(iii) to include any additional or changed material
information on the plan of distribution;
provided however, that paragraphs (1)(i) and (1)(ii) shall not apply if the
information required to be included in a post-effective amendment by those
paragraphs is incorporated by reference from periodic reports filed with the
Commission by the registrant under the Exchange Act.
(2) For determining any liability under the Securities Act, each
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration any
of the securities being registered on this registration statement that remain
unsold at the termination of the offering.
(4) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer 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 small business issuer 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 the final adjudication of such issue.
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SIGNATURES
Pursuant to 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 S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irvine, State of California, on December 18, 2003.
SSP SOLUTIONS, INC.
By: /s/ MARVIN J. WINKLER
---------------------------------------
Marvin J. Winkler,
Co-Chairman and Chief Executive Officer
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of SSP Solutions, Inc., a Delaware corporation that is filing a
registration statement on Form S-3 with the Securities and Exchange Commission
under the provisions of the Securities Act of 1933, as amended, hereby
constitute and appoint Marvin J. Winkler as their true and lawful
attorney-in-fact and agent; with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
such registration statement and any or all amendments to the registration
statement, including a prospectus or an amended prospectus therein, and all
other documents in connection therewith to be filed with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all interests and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
following capacities on the dates indicated.
Name Title Date
---- ----- ----
/s/ MARVIN J. WINKLER Co-Chairman of the Board, Chief Executive December 18, 2003
------------------------- Officer (principal executive officer) and
Marvin J. Winkler Director
/s/ KRIS SHAH Co-Chairman of the Board, President, Chief December 18, 2003
------------------------- Operating Officer, Secretary and Director
Kris Shah
/s/ THOMAS E. SCHIFF Executive Vice President and December 18, 2003
------------------------- Chief Financial Officer
Thomas E. Schiff (principal financial and accounting
officer)
/s/ GREGG AMBER Director December 18, 2003
-------------------------
Gregg Amber
/s/ JOEL K. RUBENSTEIN Director December 18, 2003
-------------------------
Joel K. Rubenstein
/s/ RON R. GOLDIE Director December 18, 2003
-------------------------
Ron R. Goldie
Director December 18, 2003
-------------------------
David A. Janes
II-8
INDEX TO EXHIBITS ATTACHED TO THIS REGISTRATION STATEMENT
Exhibit No. Description
----------- -----------
4.8 Warrant dated July 31, 2000, issued by BIZ Interactive Zone,
Inc. in favor of Roth Capital Partners, Inc. as to 23,756
shares, assumed by SSP Solutions, Inc. in the acquisition of
BIZ Interactive Zone, Inc.
4.21 Form of Placement Agent Warrants dated as of November 19, 2003
issued by SSP Solutions, Inc. in favor of Burnham Hill
Holdings, LLC (as to 800,000 shares of common stock), Hilary
Bergman (as to 49,204 shares), Brad Reifler (as to 49,204
shares), Matthew Balk (as to 65,000 shares), Eric Singer (as
to 20,681 shares), Hudson Valley Capital Management (as to
50,720 shares), Chris Shufeldt (as to 1,750 shares), Kimball &
Cross Investment Management Corp. (as to 5,830 shares), Brian
Herman (as to 27,040 shares), Sean Callahan (as to 7,600
shares), Mark Ford (as to 12,960 shares), Daniel Pietro (as to
900 shares), Claude Ware (as to 4,000 shares), James St. Clair
(as to 6,000 shares) and Roger Lockhart (as to 1,500 shares)
4.22 Form of Exchange Agent Warrants dated as of November 19, 2003
issued by SSP Solutions, Inc. in favor of Burnham Hill
Holdings, LLC (as to 163,000 shares of common stock), Hilary
Bergman (as to 9,599 shares), Brad Reifler (as to 9,599
shares) and Matthew Balk (as to 9,806 shares)
23.1 Consent of Haskell & White LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
24 Power of Attorney (contained on the signature page to this
registration statement)
II-9