EXHIBIT B
NX NETWORKS, INC.
00000 Xxxxxx Xxxxxxxxxx Xxxxx
Xxxxxxx, Xxxxxxxx 00000
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SUBSCRIPTION AGREEMENT
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Re: 50,000 SHARES OF SERIES D 8% CONVERTIBLE PREFERRED STOCK WITH WARRANTS
Dear Purchaser:
Nx Networks, Inc., a Delaware corporation (the "Company"), is
offering to sell up to 50,000 shares of Series D 8% Convertible Preferred Stock
of the Company (the "Preferred Stock") and warrants (the "Warrants") to certain
"accredited investors" (as defined under the Securities Act of 1933 (the
"Securities Act")). The terms of this offering (the "Offering") are set forth in
this Subscription Agreement, a Summary of Terms, a Registration Rights
Agreement, the Certificate of Designations related to the Preferred Stock and a
Warrant Agreement (the "Offering Documents"). The purchase price per share of
Preferred Stock and the related Warrants will be fixed at 100 times the closing
price of the Nx Networks common stock on the closing date. The Preferred Stock
and the Warrants are being offered by the Company pursuant to Section 4(2) of
the Securities Act and/or Rule 506 of Regulation D promulgated thereunder. The
Offering will be made by the Company on a "best efforts" basis, and there is no
minimum amount that must be subscribed for before the Company can accept
subscriptions.
The Preferred Stock and the Warrants are subject to the
benefits of the Registration Rights Agreement (the "Registration Rights
Agreement") providing for registration of the Common Stock issuable upon
conversion of the Preferred Stock and exercise of the Warrants and any Common
Stock issuable as a dividend on the Preferred Stock. The designations, powers,
preferences and rights of the Preferred Stock and the qualifications,
limitations and restrictions of the Preferred Stock are set forth in a
Certificate of Designations, the form of which is available upon request from
the Company (the "Certificate of Designations"). The designations, powers,
preferences and rights of the Warrants and the qualifications, limitations and
restrictions of the Warrants are set forth in the Warrant Agreement a
Certificate of Designations, the form of which is available upon request from
the Company. The Certificate of Designations will be filed with the Secretary of
State of the State of Delaware immediately prior to the initial closing in the
Offering.
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THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE, NOR HAVE THEY BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE AND NO SUCH COMMISSION HAS PASSED UPON THE
ADEQUACY OR ACCURACY OF THE DOCUMENTS RELATED TO THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Subscriptions shall be paid by check or wire transfer and deposited in
an escrow account maintained by the Company until accepted by the Company. This
subscription may be accepted by the Company at any time prior to the end of the
Offering Period (as defined in Section 1(c)). If your subscription is not
accepted, your subscription payment will be immediately returned to you. At the
time the Company accepts subscriptions, the certificates representing the
Preferred Stock and the Warrant Agreements will be issued by the Company to the
investors.
1. SUBSCRIPTION; THE OFFERING.
(a) By your execution of this Subscription Agreement and delivery of
the subscription amount to the Company, you hereby irrevocably subscribe to
purchase the amount of Preferred Stock and Warrants set forth on the signature
page of this Agreement.
(b) Subscription payments by check should be made payable to "Nx
Networks, Inc." and should be delivered, together with two fully executed and
completed copies of this Subscription Agreement to:
Xxxxx X. Xxxxxxxx
Chief Financial Officer
Nx Networks, Inc.
00000 Xxxxxx Xxxxxxxxxx Xxxxx
Xxxxxxx, Xxxxxxxx 00000
Telephone: (000) 000-0000
If you prefer to pay by wire transfer, please contact Xx. Xxxxxxxx who
will provide the necessary information.
(c) The Offering will expire on March 6, 2001, subject to extension by
the Company at its discretion (the "Offering Period"). Any subscriptions
received after the end of the Offering Period or received but not accepted prior
to the end of the Offering Period will be returned in full.
(d) This subscription is subject to the terms and conditions of the
Offering, which are described herein and in the other Offering Documents. Upon
acceptance by the Company of this subscription, and following clearance of
funds, the Company will deliver to you a Preferred Stock certificate in the
amount subscribed for, and signed copies of this Subscription Agreement, the
Warrant Agreement and the Registration Rights Agreement.
2. ACCEPTANCE OR REJECTION OF SUBSCRIPTIONS. You agree that all
subscriptions for Preferred Stock and Warrants (including this subscription) are
made subject to the following terms and conditions:
(a) All subscription payments will be held by the Company in a
segregated account until accepted or rejected by the Company.
(b) The Company may accept subscriptions received by it in such order
and at such time, prior to termination of the Offering, as the Company may, in
its sole discretion, determine.
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(c) The Company shall have the right, in its sole discretion, to reject
any subscription in whole or in part for any reason.
(d) Any subscription received but not accepted by the Company prior to
the end of the Offering Period or received by the Company after the end of the
Offering Period will be rejected by the Company.
(e) If your subscription is rejected by the Company for any reason, the
Company shall promptly return (subject to delay as necessary to permit funds
deposited to clear) to you your executed Subscription Agreements together with
all funds paid by you, without deduction and without interest.
(f) If your subscription is accepted only in part, then the Company
shall promptly return (subject to delay as necessary to permit funds deposited
to clear) to you that part of all funds paid by you relating to that part of
your subscription which is not accepted, without deduction and without interest.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. You hereby represent
and warrant to, and agree with, the Company as follows:
(a) You are an "Accredited Investor" as that term is defined in Section
501(a) of Regulation D promulgated under the Securities Act. (Specifically you
are (EACH INVESTOR MUST CHECK APPROPRIATE ITEM(S)):
|_| (i) A bank as defined in Section 3(a)(2) of the Securities Act, or
a savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act, whether acting in its
individual or fiduciary capacity; a broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); an insurance company as defined in
Section 2(13) of the Securities Act; an investment company
registered under the Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of that Act; a
small business investment company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958; a plan established and maintained
by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions, for the
benefit of its employees, if such plan has total assets in excess
of $5,000,000; an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, if the investment
decision is made by a plan fiduciary, as defined in Section 3(21)
of such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the
employee benefit plan has total assets in excess of $5,000,000 or,
if a self-directed plan, with investment decisions made solely by
persons that are accredited investors;
|_| (ii) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
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|_| (iii) An organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific purpose
of acquiring the securities offered, with total assets in excess of
$5,000,000;
|_| (iv) A director or executive officer of the Company;
|_| (v) A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his or her purchase
exceeds $1,000,000;
|_| (vi) A natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years
and has a reasonable expectation of reaching the same income level
in the current year;
|_| (vii) A trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities
offered, whose purchase is directed by a sophisticated person as
described in Rule 506(b) (2) (ii); or
|_| (viii) An entity in which all of the equity owners are accredited
investors. (If this alternative is checked, you must identify each
equity owner and provide statements signed by each demonstrating
how each qualifies as an accredited investor.)
(b) If you are a natural person, you are: a bona fide resident of the
state contained in your address set forth on the signature page of this
Agreement as your home address; at least 21 years of age; and legally competent
to execute this Agreement. If you are an entity, you are duly authorized to
execute this Agreement and this Agreement, when executed and delivered by you,
will constitute your legal, valid and binding obligation enforceable against you
in accordance with its terms.
(c) You have received, read carefully and are familiar with this
Agreement, the Summary of Terms, the Certificate of Designations, the Warrant
Agreement and the Registration Rights Agreement. Respecting the Company, its
business, plans and financial condition, the terms of the Offering, the
Preferred Stock, the Warrants and any other matters relating to the Offering:
you have received and reviewed all materials which have been requested by you;
and the Company has answered all inquiries that you or your representatives have
put to it. You have had access to all additional information necessary to verify
the accuracy of the information set forth in this Agreement, the Summary of
Terms and any other materials furnished herewith, and you have taken all the
steps necessary to evaluate the merits and risks of an investment as proposed
hereunder.
(d) You or your purchaser representative have such knowledge and
experience in finance, securities, investments and other business matters so as
to be able to protect your interests in connection with this transaction, and
your investment in the Company hereunder is not material when compared to your
total financial capacity.
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(e) You understand the various risks of an investment in the Company as
proposed herein and can afford to bear such risks, including, but not limited
to, the risks of losing your entire investment.
(f) You will acquire the Preferred Stock and Warrants for your own
account (or for the joint account of you and your spouse either in joint
tenancy, tenancy by the entirety or tenancy in common) for investment and not
with a view to the sale or distribution thereof or the granting of any
participation therein, and that you have no present intention of distribution or
selling to others any of such interest or granting any participation therein.
(g) Without limiting any of your other representations and warranties
hereunder, you acknowledge that you have reviewed and are aware of the Risk
Factors set forth Appendix A to this Agreement.
4. TRANSFER RESTRICTIONS.
(a) You agree not to sell any Common Stock acquired upon conversion of
Preferred Stock or exercise of the Warrants prior to June 30, 2001, unless (and
to the extent) such shares have been released from this obligation in accordance
with the following provisions of this Section 4(a).
(i) If the average closing bid price for the Common Stock on the
Nasdaq National Market over a period of 10 consecutive trading
days is at least 125% of the initial conversion price of the
Preferred Stock set forth in the Certificate of Designations, then
25% of your Common Stock will be released from the sales
restriction effective at that time.
(ii) If the average closing bid price for the Common Stock on the
Nasdaq National Market over a period of 10 consecutive trading
days is at least 156% of the initial conversion price of the
Preferred Stock set forth in the Certificate of Designations, then
an additional 25% of your Common Stock (50% total) will be
released from the sales restriction effective at that time.
(iii) If the average closing bid price for the Common Stock on the
Nasdaq National Market over a period of 10 consecutive trading
days is at least 195% of the initial conversion price of the
Preferred Stock set forth in the Certificate of Designations, then
an additional 25% of your Common Stock (75% total) will be
released from the sales restriction effective at that time.
(iv) If the average closing bid price for the Common Stock on the
Nasdaq National Market over a period of 10 consecutive trading
days is at least 244% of the initial conversion price of the
Preferred Stock set forth in the Certificate of Designations, then
all remaining Common Stock will be released from the sales
restriction effective at that time.
(b) You have been advised by the Company that the Preferred Stock, the
Warrants and the Common Stock issuable upon conversion of the Preferred Stock or
as dividends thereon or upon exercise of the Warrants (collectively, the
"Securities") have not been registered under the Securities Act, that the
Securities will be issued on the basis of the exemption provided by
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Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated
thereunder relating to transactions by an issuer not involving any public
offering and under similar exemptions under certain state securities laws; that
this transaction has not been reviewed by, passed on or submitted to any Federal
or state agency or self-regulatory organization where an exemption is being
relied upon, and that the Company's reliance thereon is based in part upon the
representations made by you in this Agreement. You acknowledge that you have
been informed by the Company of, or are otherwise familiar with, the nature of
the limitations imposed by the Securities Act and the rules and regulations
thereunder on the transfer of securities. In particular, you agree that no sale,
assignment or transfer of the Securities shall be valid or effective, and the
Company shall not be required to give any effect to any such sale, assignment or
transfer, unless (i) the sale, assignment or transfer of the Securities is
registered under the Securities Act, it being understood that the Securities are
not currently registered for sale and that the Company has no obligation or
intention to so register the Securities except as contemplated by the
Registration Rights Agreement, or (ii) the Securities are sold, assigned or
transferred in accordance with all the requirements and limitations of Rule 144
under the Securities Act, it being understood that Rule 144 is not available at
the present time for the sale of the Securities, or (iii) such sale, assignment,
or transfer is otherwise exempt from registration under the Securities Act. You
acknowledge that the Securities shall be subject to a stop transfer order and
the certificate or certificates evidencing any Securities shall bear the
following or a substantially similar legend and such other legends as may be
required by state blue sky laws:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE
ACQUIRED FOR INVESTMENT ONLY AND NOT FOR RESALE. THEY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW. THESE SECURITIES MAY
NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS FIRST REGISTERED UNDER SUCH
LAWS, OR UNLESS THE COMPANY HAS RECEIVED EVIDENCE
REASONABLY SATISFACTORY TO IT THAT REGISTRATION UNDER SUCH
LAWS IS NOT REQUIRED."
5. INDEMNIFICATION. You acknowledge that you understand the meaning
and legal consequences of the representations and warranties contained in
Section 3 hereof and the agreement contained in Section 4 hereof, and you hereby
agree to indemnify and hold harmless the Company and each officer, director,
employee, agent and controlling person thereof from and against any and all
loss, damage or disability due to or arising out of a breach of any such
representation or warranty.
6. INCREASE IN AUTHORIZED CAPITAL STOCK. The Board of Directors of the
Company has approved an amendment to the Company's Certificate of Incorporation
to increase the authorized number of shares of Common Stock of the Company from
55 million shares to at least 65 million shares. The Company covenants to you
that it will present this amendment to its stockholders for approval and will
undertake its commercially reasonable efforts to cause such amendment to be
approved by the stockholders of the Company as soon as practicable after the
date hereof and, in any event, prior to March 31, 2001. You acknowledge that
this amendment does not require the approval of holders of the Preferred Stock
or the Warrants.
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7. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the Company and you, and our respective successors and assigns.
Nothing in this Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim, in equity or at law, or to impose upon
any other person any duty, liability or obligation.
8. MISCELLANEOUS.
(a) All notices and other communications provided for hereunder shall
be in writing, and, if to you, shall be delivered or mailed by registered mail
addressed to you at your address as set forth below, or to such other address as
you may designate to the Company in writing, and if to the Company, shall be
delivered or mailed by registered mail to the Company at 00000 Xxxxxx Xxxxxxxxxx
Xxxxx, Xxxxxxx, Xxxxxxxx 00000, Attention: General Counsel, or to such other
address as the Company may designate to you in writing, with a copy to Xxxxxx
Xxxx & Xxxxxx LLP, Two Stamford Plaza, 000 Xxxxxxx Xxxxxxxxx, Xxxxxxxx,
Xxxxxxxxxxx 00000, Attention: Xxxx X. Xxxxxxx. All such notices shall be
effective one day after delivery or three days after mailing.
(b) This Agreement shall be construed in accordance with and governed
by the internal laws of the State of Delaware without reference to that State's
conflicts of laws provisions.
(c) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and may be amended only
by a writing executed by all parties hereto.
(d) This Agreement may be executed in one or more counterparts
representing, however, one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year this subscription has been accepted by the
Company as set forth below.
Very truly yours,
NX NETWORKS, INC.
By:
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Name:
Title:
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SIGNATURE PAGE FOR SUBSCRIPTION BY INDIVIDUALS
(NOT APPLICABLE TO SUBSCRIPTIONS BY ENTITIES, INDIVIDUALS
RETIREMENT ACCOUNT, XXXXX PLANS OR ERISA PLAN)
TOTAL SUBSCRIPTION AMOUNT $ ____________________. [THIS MUST BE COMPLETED.]
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Check One:
|_| INDIVIDUAL OWNER |_| CUSTODIAN UNDER
(One signature required below) UNIFORM GIFTS TO MINORS ACT
|_| JOINT TENANTS WITH RIGHT _________________________________
OF SURVIVORSHIP (Insert applicable state)
(All tenants must sign below) (Custodian must sign below)
|_| TENANTS IN COMMON |_| COMMUNITY PROPERTY
(All tenants must sign below) (Both spouses in community
property states must sign
below)
------------------------------------------------------------ -------------------
PRINT INFORMATION AS IT IS TO APPEAR ON THE COMPANY RECORDS.
-------------------------------- -------------------------------------
(Name of Subscriber) (Social Security or Taxpayer ID No.)
--------------------------------
-------------------------------- -------------------------------------
(Home Address) (Home Telephone)
--------------------------------
-------------------------------- -------------------------------------
(Business Address) (Business Telephone)
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-------------------------------- -------------------------------------
(Name of Co-Subscriber) (Social Security or Taxpayer ID No.)
--------------------------------
-------------------------------- -------------------------------------
(Home Address) (Home Telephone)
--------------------------------
-------------------------------- -------------------------------------
(Business Address) (Business Telephone)
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SIGNATURE(S)
Dated:
---------------------------------
(1) By: (2) By:
--------------------------------- ------------------------------
Signature of Authorized Signatory Signature or Authorized
Co-Signatory
-------------------------------- -------------------------------------
Print Name of Signatory and Title, Print Name of Co-Signatory and Title,
if applicable if applicable
================================================================================
ACCEPTED AND AGREED:
NX NETWORKS, INC.
By: Dated:
-------------------------- ---------------------------
SIGNATURE PAGE FOR SUBSCRIPTION BY ENTITIES
TOTAL SUBSCRIPTION AMOUNT $___________________. [THIS MUST BE COMPLETED.]
________________________________________________________________________________
Check one:
|_| EMPLOYEE BENEFIT PLAN OR TRUST (including pension plan, profit sharing
plan, other defined contribution plan and SEP)
|_| XXX, XXX ROLLOVER OR XXXXX PLAN
|_| TRUST (other than employee benefit trust)
|_| CORPORATION (Please include certified corporate resolution
authorizing signature)
|_| PARTNERSHIP
|_| OTHER
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________________________________________________________________________________
PRINT INFORMATION AS IT IS TO APPEAR ON THE COMPANY RECORDS.
-------------------------------- -------------------------------------
(Name of Subscriber) (Taxpayer ID No.)
-------------------------------- -------------------------------------
(Plan number, if applicable)
-------------------------------- -------------------------------------
(Address) (Telephone Number)
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Name and Taxpayer ID number of sponsor, if applicable
The undersigned trustee, partner, corporate officer or fiduciary
certificates that he or she has full power and authority from all beneficiaries,
partners or shareholders of the entity named above to execute this Subscription
Agreement on behalf of the entity and to make the representations, warranties
and agreements made herein on their behalf and that investment in the Securities
has been affirmatively authorized by the governing board or body of such entity
and is not prohibited by law or the governing documents of the entity.
SIGNATURE(S)
Dated:
-----------------------------
By: By:
--------------------------------- ------------------------------------
Signature of Authorized Signatory Signature or Authorized Co-Signatory
------------------------------------ ------------------------------------
Print Name of Signatory Print Name of Co-Signatory
------------------------------------ ------------------------------------
Print Title of Signatory Print Title of Required Co-Signatory
================================================================================
ACCEPTED AND AGREED:
NX NETWORKS, INC.
By: Dated:
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APPENDIX A
RISK FACTORS
This offering involves a high degree of risk. Before you invest in the
Preferred Stock and the Warrants offered hereby, you should consider carefully
the following factors. Our business and results of operations could be seriously
harmed by any of the following risks. The value of the Preferred Stock and the
Warrants and the trading price of our Common Stock could decline due to any of
these risks, and you may lose part or all of your investment.
TO DATE, WE HAVE INCURRED SUBSTANTIAL NET LOSSES, AND IF THIS CONTINUES, WE MAY
BE UNABLE TO MEET OUR WORKING CAPITAL REQUIREMENTS
For the years ended December 31, 1999 and 1998, respectively, we
incurred net losses of approximately $26.2 million and $6.5 million and, on a
pro forma basis, after giving effect to our December 1999 merger with OpenRoute
Networks, Inc. and our March 2000 acquisition of AetherWorks Corporation, we
would have had a net loss of approximately $94.5 million for the year ended
December 31, 1999. Through September 30, 2000, we have incurred additional
losses of approximately $88.5 million. These losses present a significant risk
to our stockholders. If we cannot achieve profitability or positive cash flows
from operating activities, we may be unable to meet our working capital and
other payment obligations, which would have a material adverse effect on our
business, financial condition and results of operation and the price of our
common stock. In addition, if we cannot return to sustained profitability we
will be forced to sell all or part of our business, liquidate or seek to
reorganize.
WE REQUIRE ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS, AND WE CANNOT BE
CERTAIN THAT THE NECESSARY FUNDS WILL BE AVAILABLE
Our ability to return to and maintain profitability is largely
dependent upon our ability to introduce new products and technologies and expand
our sales efforts in new geographic and product markets. These activities
require substantial capital, and if we do not have access to sufficient funds,
either from our own operations or through third party financing, our ability to
make these necessary expenditures will be limited. Also, if stockholders do not
approve some of the proposals we present to them at our scheduled March 6, 2001
Special Meeting of Stockholders, we will be required to make significant cash
payments. These payments are described below under the caption "--If our
stockholders do not approve proposals presented to them at our March 6, 2001
Special Meeting of Stockholders, we may have substantial additional cash payment
obligations in March 2001 and September 2001, and we do not currently have
sufficient capital to pay these obligations." Our current available cash and our
anticipated cash from operations are insufficient to fund our operations until
we are able to attain profitability. Accordingly, we will require third party
financing in order to continue our operations. We cannot assure you that we will
be able to obtain financing on terms favorable to us, or at all. If we obtain
additional funds by selling any of our equity securities, the percentage
ownership of our stockholders will be reduced, stockholders may experience
additional dilution, or the equity securities may have rights, preferences or
privileges senior to the common stock. If we obtain additional funds by selling
assets, there can be no assurance that we will be able to negotiate a favorable
price for those assets or that the loss of those assets will not affect our
future business prospects. If adequate funds are not available to us or
available to us on satisfactory terms, we may be required to limit our marketing
and product development activities or other operations, or otherwise modify our
business strategy. These actions, if taken, could increase the difficulties we
face in returning to sustained profitability.
We have been advised by our independent public accountants that if we
have not raised sufficient capital to meet our projected obligations for 2001
prior to the completion of their audit of our financial
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statements for the year ending December 31, 2000, their auditors' report on
those financial statements will be modified to reflect this contingency.
UNLESS OUR STOCKHOLDERS APPROVE PROPOSALS PRESENTED TO THEM AT OUR MARCH 6, 2001
SPECIAL MEETING OF STOCKHOLDERS, THE NUMBER OF SHARES OF COMMON STOCK THAT WE
HAVE AVAILABLE FOR SALE TO RAISE CAPITAL IS LIMITED
We have 55 million shares of authorized common stock, all of which are
currently issued or reserved for issuance. Unless the number of authorized
shares is increased, we will not be able to sell common stock to finance our
operations or other obligations. We require additional funds to finance our
operations, as described above under the caption "--We require additional
capital to continue our operations, and we cannot be certain that the necessary
funds will be available," and we may incur additional payment obligations in
2001 as described below under the caption "--If our stockholders do not approve
proposals presented to them at our March 6, 2001 Special Meeting of
Stockholders, we may have substantial additional cash payment obligations in
March 2001 and September 2001, and we do not currently have sufficient capital
to pay these obligations." We have called a meeting of stockholders for March 6,
2001 to vote upon a proposal to increase our capital stock from 55 million
shares to 85 million shares. We cannot assure you that our stockholders will
approve the increase in our authorized common stock. If our stockholders do not
approve the increase in our authorized common stock, we will have to raise the
necessary capital through debt financing or the sale of assets or securities
other than common stock. Although we cannot assure you that we will be able to
obtain the necessary funds if the stockholders approve the increase in our
authorized number of shares of common stock, we believe it will be much more
difficult for us to obtain the necessary financing if we cannot sell additional
shares of common stock.
IF OUR STOCKHOLDERS DO NOT APPROVE PROPOSALS PRESENTED TO THEM AT OUR MARCH 6,
2001 SPECIAL MEETING OF STOCKHOLDERS, WE MAY ISSUE SHARES THAT CAUSE US TO BE
DELISTED FROM THE NASDAQ STOCK MARKET
At our March 6, 2001 Special Meeting of Stockholders, we will ask our
stockholders to authorize us to issue shares of common stock in private
transactions which together with other shares we have issued would exceed 20% of
our outstanding common stock. The listing requirements of the Nasdaq Stock
Market, on which our common stock is listed, will not permit us to issue more
than 20% of our common stock in private transactions without stockholder
approval if the sales price is less than the greater of the book or market price
of our common stock. As of November 30, 2000 the book value per share of our
common stock was approximately $2.66 and since December 16, 2000 the market
value of our common stock has fluctuated between $0.50 and $3.06 per share. We
cannot assure you that we will be able to raise the capital we need to fund our
operations and other obligations without selling shares below the greater of our
book value per share or market value per share. If our stockholders do not
approve this proposal but they do authorize the increase in the number of
authorized shares of common stock, we expect that we would sell the shares
necessary to finance our operations and then be delisted from the Nasdaq Stock
Market. Delisting from the Nasdaq Stock Market would have an adverse effect on
the trading market for our common stock and the price of our common stock.
IF OUR STOCKHOLDERS DO NOT APPROVE PROPOSALS PRESENTED TO THEM AT OUR MARCH 6,
2001 SPECIAL MEETING OF STOCKHOLDERS, WE MAY HAVE SUBSTANTIAL ADDITIONAL CASH
PAYMENT OBLIGATIONS IN MARCH 2001 AND SEPTEMBER 2001, AND WE DO NOT CURRENTLY
HAVE SUFFICIENT CAPITAL TO PAY THESE OBLIGATIONS
At our March 6, 2001 Special Meeting of Stockholders, we will ask our
stockholders to authorize us to issue 1.75 million shares of common stock
related to our acquisition of AetherWorks Corporation. Under the listing
requirements of the Nasdaq Stock Market, on which our common stock is listed, we
cannot issue more than 20% of our common stock in an acquisition transaction
without stockholder approval. This 1.75 million shares represents the amount by
which the
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shares we have agreed to issue to the former owners of AetherWorks exceeds
this 20% limitation. We agreed with the former owners of AetherWorks Corporation
that if our stockholders do not approve the issuance of the 1.75 million shares,
then we will pay the former owners of AetherWorks the cash value of those
shares. The cash value per share will be the greater of $2.93 or the average
last sales price for our common stock for the five trading days preceding March
6, 2001. Based solely on the $2.93 figure, this payment will be at least $5.1
million. The AetherWorks agreement underlying this obligation is described more
fully below under the caption "Selling Security Holders." In addition, we agreed
with the recent purchasers of our preferred stock and related warrants that if
our stockholders do not increase the number of our authorized shares of common
stock to at least 65 million by September 2001, then we will redeem the
preferred stock and warrants. The redemption price will be the liquidation value
of the preferred stock and, for each share of common stock issuable upon
conversion of the preferred stock or the warrants, 110% of the amount, if any,
by which the price of our common stock at the redemption date exceeds the
conversion or exercise price of the related preferred stock or warrants. Based
solely on the liquidation preference of the preferred stock we have issued, this
payment will be at least $2.5 million. The terms of the preferred stock and the
warrants are described more fully under the caption "Recent Developments
-Private Financing" below. We cannot assure you that our stockholders will
approve these proposals. If we become obligated to pay these amounts in cash, we
cannot assure you that we will be able to fund these obligations. Also, if our
stockholders do not approve these proposals, it may become more difficult for us
to obtain financing on terms favorable to us because many investors will be
reluctant to invest if the proceeds from their investment are used to pay
obligations to other investors.
WE RELY TO A LARGE EXTENT ON INDEPENDENT DISTRIBUTION CHANNELS AND THE LOSS OF A
SIGNIFICANT NUMBER OF DISTRIBUTORS COULD ADVERSELY EFFECT US
We rely on reseller channels, including distributors and systems
integrators, for a significant portion of our revenues. In particular, in
foreign markets we often have one distributor designated for an entire country,
and that distributor provides local support and service for our products. The
loss of one or more significant resellers could adversely affect our business in
terms of:
o lost revenues;
o lost market presence; and
o the difficulties we would encounter in servicing customers
introduced to us by our resellers if we do not have other
resellers in that geographic area.
WE ARE EXPOSED TO POTENTIAL DELAYS IN PRODUCT SHIPMENTS BECAUSE WE CONTRACT OUT
PRODUCT MANUFACTURING AND SOME COMPONENTS FOR OUR PRODUCTS ARE AVAILABLE ONLY
FROM A SINGLE SUPPLIER OR A LIMITED NUMBER OF SUPPLIERS
We rely on others to manufacture our products and product components
and this dependence exposes us to potential interruptions or delays in product
delivery. An interruption could have a short- term effect on our revenues and a
longer term effect on our ability to market our products. Currently, we rely on
a single contract manufacturer to assemble and test our voice products. Also,
some of the components we use in our products are available from only one source
or a limited number of suppliers. Although we have been able to obtain our
products and these components to date, our inability to develop alternative
sources if and as required in the future, or to obtain sufficient sole source or
limited source components as required, could result in delays or reductions in
product shipments.
WE HAVE A SIGNIFICANT PAYMENT OBLIGATION TO OUR PRIMARY MANUFACTURER, AND IF WE
DO NOT MAINTAIN OUR PAYMENT SCHEDULE THE MANUFACTURER MAY CEASE SHIPPING OUR
PRODUCTS
We authorized our primary manufacturer to purchase a substantial amount
of parts, materials and long lead-time items during 2000 in anticipation of a
significant increase in product sales during the year.
3
Our sales did not reach the levels we expected, and we have not utilized a
substantial amount of the raw materials. Accordingly, we have a payment
obligation of approximately $5.5 million to the manufacturer to pay for the cost
of these materials. We have agreed upon a payment schedule with the
manufacturer, and during the period we are paying down the obligation the
manufacturer is requiring us to pay in advance for all fabrication costs. If we
do not adhere to the payment schedule or if we do not pay fabrication costs in
advance, the manufacturer has expressed its intent not to ship any products on
our behalf. Although we expect to have sufficient capital to maintain this
payment schedule and pay the fabrication costs, if we do not adhere to the
schedule and the manufacturer ceases to ship products on our behalf, then a
material and adverse result to our revenues could occur.
OUR BUSINESS WILL SUFFER IF WE LOSE CERTAIN KEY PERSONNEL OR FAIL TO ATTRACT AND
RETAIN OTHER QUALIFIED PERSONNEL
The success of our business is dependent, to a significant extent, upon
the abilities and continued efforts of our management, sales and engineering
personnel, many of whom would be difficult to replace. We do not have employment
contracts with all of our key employees and we do not have "key man" life
insurance on any of our officers or directors.
Our success will also depend on our ability to attract, retain and
motivate qualified management, sales and engineering executives and other
personnel who are in high demand and who often have multiple employment options.
In addition, as a result of the changes to technology-based industries, and
particularly telecommunications companies, over the past year, many employees
that we would like to retain may decide to pursue other opportunities or we may
be forced to increase their compensation to retain them. The loss of the
services of key personnel, or the inability to attract, retain and motivate
qualified personnel, could have a material adverse effect on our business,
financial condition, results of operations and the price of our common stock.
OUR INTELLECTUAL PROPERTY RIGHTS ARE AN IMPORTANT PROTECTION FOR OUR PRODUCTS,
AND WE COULD BE ADVERSELY AFFECTED IF OUR RIGHTS ARE CHALLENGED OR CIRCUMVENTED
BY COMPETITORS
Our ability to compete successfully within our industry is dependent in
part upon:
o patents and nondisclosure agreements that we have obtained;
o technical measures that we take to protect confidential
information; and
o trade secret, copyright and trademark laws that we rely on to
establish and protect our proprietary rights.
If any of our proprietary rights are successfully challenged or
circumvented by competitors, or if other companies are able to market
functionally similar products, systems or processes without infringing our
proprietary rights, then our results of operations and the value of our common
stock could be materially and adversely affected.
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE
The market price of our common stock has been and can be expected to
be significantly affected by factors such as:
o quarterly variations in our results of operations;
o the announcement of new services or service enhancements by us or
our competitors;
o technological innovations by us or our competitors;
o changes in earnings estimates or buy/sell recommendations by
analysts;
4
o the operating and stock price performance of other comparable
companies; and
o general market conditions or market conditions specific to
particular industries.
In particular, the stock prices for many companies in the
telecommunications equipment sector have experienced wide fluctuations that have
often been unrelated to their operating performance. We have been, and we are
likely to continue to be, subject to such fluctuations.
WE RECENTLY REPRICED SUBSTANTIALLY ALL OF OUR STOCK OPTIONS TO A LOWER EXERCISE
PRICE, AND THE RESULTING ACCOUNTING CHARGES MAY CAUSE OUR FUTURE EARNINGS TO
FLUCTUATE WIDELY
As part of a program to retain our employees, we adopted a program to
reprice all the options of our current employees. We also repriced the options
issued to our board of directors and to our chairman of the board. Under the
program, each of these persons will exchange their current stock options for
newly issued stock options with an exercise price of $0.75 per share. Although
each employee may elect not to participate in the program, we expect that
approximately 10 million options will be exchanged to obtain the lower exercise
price. Under applicable accounting rules, we will have to account for future
variations in the price of our common stock above $0.75 per share as
compensation expense until the repriced options are either exercised, cancelled
or expire. This calculation will be made each quarter based upon the performance
of our common stock in that quarter. Accordingly, our operating results and
earnings per share will be subject to potentially significant fluctuations based
upon changes in the market price of our common stock.
OUR CERTIFICATE OF INCORPORATION AND BY-LAWS CONTAIN PROVISIONS THAT COULD DELAY
OR PREVENT A CHANGE IN CONTROL
Provisions of our certificate of incorporation and by-laws may have
the effect of discouraging, delaying or preventing a take-over attempt that
could be in the best interests of our stockholders. These include provisions
that:
o separate our board of directors into three classes;
o limit the ability of our stockholders to call special stockholder
meetings;
o require advance notice of nominations for directors and
stockholder proposals to be considered at stockholder meetings;
and
o require a vote greater than two-thirds to remove directors from
office or amend many of the provisions of our certificate of
incorporation and by-laws.
Our board of directors also has the right, without further action of
the stockholders, to issue and fix the terms of preferred stock, which could
have rights senior to the common stock. We are also subject to the "business
combination" provisions of the Delaware General Corporate Law, which impose
procedures impeding business combinations with "interested stockholders" that
are not approved of by our board of directors.
RAPIDLY CHANGING TECHNOLOGY MAY MAKE OUR PRODUCTS OBSOLETE OR UNMARKETABLE
We have focused our products on the edge of the Internet and telephony.
This market is characterized by rapid technological change, frequent new product
introduction and evolving industry standards. The introduction of products
embodying new technologies by our competitors and the emergence of new industry
standards could render our existing products obsolete and could cause new
products to be unmarketable. Under these circumstances, our revenue would be
adversely affected.
5
Our success will depend on the ability to address the increasingly
sophisticated needs of customers, to enhance existing products and to develop
and introduce, on a timely basis, new competitive products that keep pace with
technological development and emerging industry standards. If we cannot
successfully identify, manage, develop manufacture or market products
enhancements or new products, our business will be materially and adversely
effected.
WE HAVE ADOPTED A NEW MANAGEMENT INFORMATION SYSTEM AND IF WE CANNOT INTEGRATE
THIS SYSTEM WE MAY HAVE DIFFICULTY EFFECTIVELY MANAGING OUR BUSINESS AND
PREPARING TIMELY FINANCIAL REPORTS
We adopted a new comprehensive management information system, and we
are still in the process of implementing the installation and integrating the
operations of OpenRoute and AetherWorks, the companies we acquired in December
1999 and March 2000. If we are unable to fully implement and integrate this
system, we could have difficulties in preparing and maintaining the systems and
reports we need to effectively manage our business and ensure timely financial
reporting. These difficulties could result in adverse effects on our business.
A PORTION OF OUR REVENUES ARE DERIVED FROM INTERNATIONAL SALES, WHICH ARE
SUBJECT TO FOREIGN REGULATORY STANDARDS AND CURRENCY EXCHANGE RATE FLUCTUATIONS
International sales accounted for 47% and 53% of our total revenues in
1999 and 1998, respectively, and international sales will continue to be
significant to us. The conduct of international operations subjects us to
certain risks. Foreign regulatory bodies continue to establish standards
different from those in the United States, and our products are designed
generally to meet those standards. Our inability to design products in
compliance with such foreign standards could have an adverse effect on our
operating results. Also, our international business may be affected by changes
in demand resulting from fluctuation in currency exchange rates and tariffs and
difficulties in obtaining export licenses. We do not expect that we will hedge
against fluctuations in currency exchange rates.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER
The Preferred Stock and Warrants being issued in this offering,
including the Common Stock underlying the Preferred Stock and the Warrants, have
not been registered under the Securities Act. Therefore, these securities are
"restricted securities" for purposes of federal and state securities laws.
"Restricted securities" cannot be resold except pursuant to a registration
statement filed with the SEC or pursuant to an exemption from the registration
requirements of the Securities Act and applicable state law. While we are
committed to file registration statements to cover the common stock underlying
the Preferred Stock and the Warrants, the timing of the effectiveness of the
registration statement and our ability to maintain the effectiveness of any
registration statement that is declared effective is beyond our control. In
addition, by signing the Subscription Agreement, each investor will agree to
retain the Common Stock until at least June 30, 2001 unless our stock price
rises significantly. There is no public market for the Preferred Stock or the
Warrants, and it is very unlikely that a market for the Preferred Stock or the
Warrants will develop. For all of these reasons, you should treat the Preferred
Stock, the Warrants and the underlying Common Stock offered hereby to be
illiquid securities, and you should ensure that you have sufficient other
sources of revenue to support yourself if your personal circumstances change
prior to the time you can sell your Preferred Stock, Warrants or Common Stock.
* * * * *
